The Day Hagan Logix Tactical Dividend Strategy returned +1.08 percent* during the month of May, ahead of its benchmark, the Russell 1000 Value, at +0.59 percent. For 2018 year to date, Day Hagan Logix is roughly flat, at -0.02%, 191 basis points ahead of the Russell 1000 Value Index. Over the last twelve months, the gap between Day Hagan Logix and the Russell is even wider, +11.15 percent* (Day Hagan Logix) versus the Russell at 8.25 percent; all numbers are total return and gross of fees. Day Hagan Logix continues to show meaningful outperformance while taking lower volatility risk than its benchmark. Since 2002 inception, the strategy has produced a beta of 0.61 (effectively taking 39 percent less volatility risk than the benchmark) while outperforming both the Russell 1000 Value index as well as the broad-based S&P 500 Total Return index by over 200 basis points annually. In fact, over the last decade, during a period of value underperformance, the deep value-oriented Day Hagan Logix strategy has meaningfully outperformed not only the Russell 1000 Value index, but also the S&P 500 index as well.
While outperforming our benchmark, we are holding a cash position as part of our portfolio risk management process. In other words, our recent outperformance comes despite being defensive and taking less risk. Our goal is to be fully invested. However, if a sufficient number of appropriate opportunities are not available based on our objective discipline, we are comfortable holding cash to mitigate downside until we see compelling risk-return present itself in new holdings. We’re often asked, “Would it take a correction for you to be fully invested?” The answer historically—and we confidently expect in the future—is “no.” One of the compelling characteristics of our stock selection methodology involves sectors, industries and individual holdings that may have different drivers than the broader market. Our deep value focus means we may see an opportunity in a specific industry grouping or name based on price movement that has very little (or nothing) to do with the direction of the broad markets. What we can say currently is that our broader universe of screened, eligible industries and names is significantly overvalued based on our measures (by about 28% as we write this) while the names we hold in the portfolio are undervalued (by about 50%). This spread is as wide as we’ve seen it in our 16+ year history, and it has us excited about the portfolio’s upside potential as we continue to navigate risk carefully.
Another question we frequently get from clients relates to our stop-loss paradigm. Risk management is critical to our successful, 16+ year track record, and individualized stop-loss levels are a component of this. Occasionally, a portfolio holding will trigger a stop-loss, forcing a sale, which we view as an expected part of our process in managing downside capture and overall performance. Consistent with history, we have a few names currently that are on a watch list related to the stop-loss discipline. While we believe strongly in those particular names and their future risk-return dynamic, we follow an objective, unemotional process in making stop-loss decisions. Our stop-loss discipline is multifaceted and based on four primary pillars: 1) Current return on cost, 2) absolute 1- and 3-month price performance, 3) relative (to benchmark) 1- and 3-month performance, and 4) a stock-specific intrinsic value calculation that determines potential “floor value” that a stock price may reach in a worst-case scenario. If you’d like to understand our stop-loss discipline in further detail, we have a two-page FAQ piece available upon request.
We have now held Specialized REITs as an industry grouping for just under three months. We hold four names in this grouping: American Tower (AMT), Public Storage (PSA), Ventas (VTR) and Welltower (WELL). In the roughly three-month period, all four names have positive performance and, through May, have produced an overall return of +6.2 percent*. Based on our valuation methodology, we found attractive entry points in these names as REIT industry- and company-specific sentiment had turned negative, leading, we believe, to an overreaction in terms of stock price. Part of this negative sentiment stems from interest rate concerns, with the conventional wisdom being that rising rates would punish higher yielding “bond proxies” like REITs. Our analysis of risk-return determined that downside from rising rates was already baked into stock prices of the REITs we purchased. More generally, even though our strategy uses dividend yield as a valuation metric (alongside a fundamental overlay), we have consistently shown positive portfolio performance during periods of rising rates, for example in 2013 during a period when the 10-year Treasury nearly doubled and Day Hagan Logix was +18.8 percent* for that same timeframe.
On a stock-specific basis, we note that the REITs we own are somewhat unique versus a typical retail or mall-based REIT. As a result, they have different drivers that impact performance. American Tower (AMT), for example, leases space on communications towers and sites to wireless providers and broadcasters. The company benefits from the massive growth in wireless demand, has long-term 5-10 year leases, and, with very little variable cost to put on a new tenant, meaningful operating leverage to grow margins. While maintaining an extremely strong balance sheet, the company has tripled its dividend over the last five years and announced a $2B stock buyback in December 2017. The company continues to realize meaningful growth opportunities internationally as well.
During the month of May, we sold Expeditors International of Washington (EXPD) out of our Airfreight & Logistics grouping. The company had a strong quarterly earnings release, pushing the name towards our measure of fair market value and triggering a sale of the position. We realized a gain of about 74 percent* on the name since purchase at the end of 2012. Sell-side research analysts did not like EXPD going into the call, with 13 of 14 firms covering the name, showing it as a hold, sell or strong sell. We mention this more as a note of differentiation in terms of our valuation methodology versus the sell-side and even other buy-side firms. The EXPD sale was on the heels of another Airfreight & Logistics sale back in the latter part of April: C.H. Robinson Worldwide (CHRW), first purchased in June 2015 and returning about 52 percent* for the portfolio.
The Day Hagan Logix Tactical Dividend strategy continues to show outperformance with less risk versus its benchmark. We encourage your questions and are always happy to speak further about our approach and portfolio positioning.
Wishing you a great summer.
- Robert Herman
- Donald L. Hagan, CFA
- Jeffrey Palmer
- Arthur S. Day
Day Hagan Logix Tactical Dividend strategy Net Returns: Month of May = +0.98 percent. Year-to-date through May 31, 2018 = -0.03 percent. Trailing 1-year through May 31, 2018 = +10.6 percent.
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.
PDF copy of article: Day Hagan Logix Tactical Dividend Strategy Update June 2018 (PDF)
Disclosure: *Note that individuals’ 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 Logix (DH Logix), 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 DH Logix 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. DH Logix, accounts that DH Logix 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. DH Logix 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 DH Logix recommendations or DH Logix performance rankings, one should also consider that DH Logix 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 DH Logix’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.
Day Hagan Logix is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Day Hagan Logix claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Day Hagan Logix has been independently verified for the periods April 30, 2002 through December 31, 2016. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. 2 Calculation Methodology: Pure gross of fees returns are calculated gross of management, custodial fees and transaction costs and are shown as supplemental information. Net of fees returns are calculated net of actual management fees, transaction costs and gross of custodian (trust) fees. Net of fees returns for wrap accounts are calculated net of management fees, transaction costs and all administrative fees charged directly to the client by the broker-dealer.