The Day Hagan Logix Tactical Dividend strategy (DHLTD) returned +2.73%* during the month of September, versus the Russell 1000 Value at +3.57%* and the S&P 500 at +1.87%*. Through the first three quarters of 2019, DHLTD has generated returns of +12.73%* while maintaining a defensive cash position, as dictated by our methodology, throughout the year. All numbers are gross of fees and total return.
During September, value stocks rebounded sharply relative to growth stocks, providing hope for value investors. The Russell 1000 Growth Index was negative for September at -0.75% vs. the positive performance noted above for the Russell 1000 Value Index. Whether this is the beginning of a reversal for value vs. growth is too early to say, and the narrative is complicated, but there are some historical data points to indicate the rotation is sustainable.
The story, however, isn’t as simple as value vs. growth. What we saw in early September was a sharp rally in what we term “True Value” and cyclicals, like energy and financials, while growth, momentum, and low-volatility strategies experienced significant weakness. With this in mind, our view is that DHLTD provides an effective and necessary complement and diversification to growth/momentum/low-volatility portfolio exposure.
In terms of where we go from here, the rotation from momentum into value over three days in September was identified as among the largest over the last 30 years. Historically, significant momentum sell-offs of this magnitude have led to a wide performance spread over the next twelve months, with value showing significant historical outperformance (source: J.P. Morgan). As it relates to Day Hagan Logix and portfolio construction, our process objectively seeks out inexpensive valuations wherever they may be, whether or not companies are categorized as value or growth. Regardless of what factors are in favor at a given point in time, over a market cycle, Logix has consistently shown positive alpha generation and low beta.
Not surprisingly, based on the commentary above, during the month, our financials exposure (banks, asset management) led performance with energy holdings also strong. In our banks industry grouping, we added The PNC Financial Services Group (PNC) to the portfolio in early September which is up over 9.3%* since our purchase less than a month ago. PNC is consistent with our other bank holdings in that it has worked to diversify revenue streams, grow non-interest income, and reduce both interest rate and credit-related risk. In the name of diversification, it’s interesting to note that PNC owns about 22% of Blackrock, the world’s largest asset management firm, which is another Logix holding. Given PNC’s healthy balance sheet, the company has the capacity to continue supporting shareholder-friendly behavior. In Q3, PNC raised its dividend 21% and authorized over $4B in share buybacks over the next four quarters.
In mid-September, using drones, terrorists attacked critical Saudi Arabian oil processing facilities at Abqaiq cutting the country’s production by 50%, representing about 5% of global output. Initially, this caused a spike in oil prices and renewed global recession fears. Ultimately, the impact was more muted as the Saudi energy ministry tapped into reserves and expected to be back at full capacity by the end of September. Regardless, our diverse energy holdings showed reasonably attractive performance during the month, up close to 4%*, led by Suncor Energy.
It is interesting to note that more than half of public energy companies are at stock prices below pre-terrorist attack levels, showing a continued disconnect between the price of oil and company valuations, now at their widest disparity since 1990 (source: J.P. Morgan). Incorporating the current geopolitical landscape and a potentially negative impact on oil supply (including sanctions on Iran and Venezuela), it shouldn’t be surprising that insider buying has continued to ramp up considerably in the energy sector. Shareholder friendly behavior with increased buybacks and a dividend yield around double that of the S&P 500 is evidence of healthy balance sheets.
More specific to our energy exposure, moving forward, we see our higher quality holdings as being the beneficiaries of the struggles of weaker names trying to stay afloat. One example, EOG Resources, is a leading exploration and production (E&P) energy company (the second-largest U.S. onshore producer, behind Chevron) and was an early mover on most major U.S. shale plays. With its focus and experience, EOG has above industry average production rates and below-average production costs, giving it unique positioning among E&P companies. In fact, with smaller, debt-laden shale companies either going bankrupt or needing to explore alternatives, EOG is in a meaningful position of strength versus its peers moving forward. EOG maintains modest debt and significant cash on its balance sheet while continuing to generate attractive free cash flow, giving it plenty of financial flexibility. Our price target on EOG is more than double its current share price.
As we embark upon the final three months of the year, our strategy indicates caution is warranted, but as always, our focus is on both upside and downside capture. We have been able to generate attractive, absolute returns for the 2019 year-to-date period and throughout a bull market where value investing has been out of favor. Whether September represents a turning point for value remains to be seen, but we are optimistic as it relates to our current portfolio holdings and the untapped value we see, based on the differentiated process we have used successfully over the last nearly 18 years.
We look forward to being in touch, and please don’t hesitate to call or email us with any questions or comments.
Robert Herman, MBA
Donald L. Hagan, CFA
Jeffrey Palmer, CIPM
Arthur S. Day
Steve Zimmerman, MBA
Print Copy of Article: Day Hagan Logix Tactical Dividend Strategy Update October 2019 (PDF)
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, 2018. 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. Net return for the strategy year-to-date through September 30, 2019 is +12.18%.
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. The S&P 500® Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.
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 express 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. 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.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.