The Day Hagan Logix Tactical Dividend Strategy delivered a strong November, returning +4.54% gross of fees* and +4.48% net of fees* for the month vs. the S&P 500 index (+3.07%) and the Russell 1000 Value index (+3.06%); all numbers are total return. The portfolio continues to hold a meaningful cash position consistent with our discipline. The cash allocation is the result of not having enough qualifying industries and equities that meet our specific valuation criteria. We appear to be in good company in terms of holding cash, as Berkshire Hathaway (based on current reporting) currently maintains just over 37% in total cash holdings.
Importantly, our defensive stance is mandated by our objective and methodical process, which utilizes dividend yield-based valuation as the foundation, supported by fundamental analysis. We view our current portfolio of holdings as highly compelling based on our risk-return methodology. As of December 4, our portfolio positions have an average fair market value upside target of +34%.
In last month’s letter, we wrote, in the context of value vs. growth investing, that given how extended the performance disparity had become in favor of growth, the investing paradigm could shift back rapidly and significantly towards value. In the last few trading days of November, we did indeed witness a shift back towards value, driven in part by tax reform and dovish Fed comments. While it’s too early to call it a trend, it was a notable move. We believe there is still meaningful opportunity ahead for value to outperform growth as year-to-date Russell 1000 Value index performance is still about 1700 basis points behind the Russell 1000 Growth index.
While Day Hagan Logix certainly can be seen as a value manager in the broader sense, we would also offer that our approach to buying undervalued industries and names does not always correlate well to more traditional value measures. It is worth highlighting our performance during the bull market from the end of 2008 through the end of 2016, where on a gross basis we outperformed the S&P 500 and Russell 1000 Value total indexes on a total return basis, inclusive of our various cash positions. We believe in buying into industries and companies trading at meaningful discounts to our own differentiated determination of fair value. Historically, in terms of upside and downside capture vs. relevant indexes, this has worked in our favor over a market cycle. A small, very short-term, but recent illustrative example of this is our outperformance over the last three trading days of November versus not only the Russell 1000 Growth (by about 160 basis points) but also the Russell 1000 Value (by 40 basis points).
We continue to hold six industry groupings and 24 names, the low end of our range historically. As mentioned above, while we have a high degree of confidence around the risk-adjusted return potential of our current holdings, there is a dearth of overall opportunity, which leads us to an elevated cash position. Even with cash, November performance was strong, led by names in the Communications and Networking industry (more on those holdings below) and also the Airfreight & Logistics industry. Every one of our industry groupings was positive during the month. For the year, our Asset Management-related holdings continue to lead performance, with our Airfreight & Logistics holdings not far behind.
Our Communications & Networking holdings have been strong performers to date, following industry purchase on September 25 of this year. Meaningful outperformance relative to our benchmarks occurred almost immediately after buying the industry. While this is, of course, a positive, we typically expect to have to exercise patience before seeing our thesis play out given our approach in buying out-of-favor, undervalued industries.
In any case, regardless of timeframe, the Communications and Networking industry purchase is a worthwhile case study in understanding our expectations around the industries we own:
- We purchased four holdings (Cisco, Qualcomm, FLIR and InterDigital) on 9/25/2017. Prior to purchase, for the year to date through 9/25/2017 period, the average relative performance versus the S&P 500 for the four stocks was -16.6%. In other words, the group of companies had underperformed the S&P 500 by -16.6%. Since our purchase, through the end of November, average relative performance for the roughly two-month period is +9.0%*.
- Based on our process, we recognized the attractive entry points and the opportunity they provided at the time of purchase.
Consistent with our 15+ year history, we continue to seek attractive entry points and positive risk/reward opportunities. Our valuation approach involves identifying industry and individual stock price cycle lows in order to make appropriate buys. In turn, we strive to sell these names as they approach our measure of fair market value. In doing this consistently in a disciplined manner, our primary investment objectives are downside protection, capital appreciation and cash flow from dividends. Since 2002 inception, this has led to over 200 basis points of annualized outperformance versus the S&P 500 and the Russell 1000 Value, while maintaining a beta of just 0.61.
Finally, an interesting market observation: Since 1928, December has never been the S&P 500’s worst month (and to this point, the worst month of 2017 has been March, which was up 12 basis points). We look forward to reporting back to you early in January on our full-year performance and thoughts on the future.
Wishing you the happiest of holidays and as always, call or email us any time with questions or comments.
- Robert Herman
- Donald L. Hagan, CFA
- Jeffrey Palmer
- Arthur S. Day
PDF Copy of article: Day Hagan Logix Tactical Dividend Strategy Update December 2017 (PDF)
Note: The S&P 500 Index is based on the market capitalizations of 500 large U.S. companies having common stock listed on the NYSE or NASDAQ. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Indexes are unmanaged, fully invested, and cannot be invested in directly.
Disclosure: *Note that individual’s percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
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Down Capture ratio measures the portion of bear market movements that the money manager(s) captured. Ideally, the down capture will be less than 100%. Alpha measures the difference between the separate account's actual returns and its expected performance given its level of risk (as measured by beta). Alpha is often seen as a measure of the value added or subtracted by a money manager. The higher the alpha, the better the manager is at selecting stocks. Specifically, measures the manager's excess return over and above that predicted by their benchmark and beta. Calculated for separate accounts with at least a three-year history. Beta is a measure of a separate account's sensitivity to a benchmark (i.e. often the general market as represented by S&P 500). A portfolio with a beta greater than one is more volatile than the market, and a portfolio with a beta less than one is less volatile than the market. Calculated for separate accounts with at least a three-year history. Sharpe Ratio measures risk-adjusted return by using standard deviation and excess return to determine reward per unit of total risk. Use of standard deviation as a measure of risk assumes the separate account has not been fully diversified to eliminate non-systematic risk as a factor of investor concern. The higher the ratio, the better the fund's risk-adjusted performance. Should be compared to other managers and the benchmark.