Day Hagan Strategy Update

DAY HAGAN STRATEGY UPDATE

DAY HAGAN TACTICAL DIVIDEND STRATEGY UPDATE: SEPTEMBER 6, 2016

SUMMARY

General commentary regarding the financial markets and an update regarding the Day Hagan Tactical Dividend Strategy.

POSTED

September 6, 2016

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For the year to date through August 2016, DHTD has returned +10.49% gross and +10.05% net of fees. By comparison, year to date, the S&P 500 has returned +7.82% and the Russell 1000 Value +10.23% representing a relative rebound on traditional value metrics. All numbers are total return. During the month of August, there were no portfolio changes. Our portfolio currently holds twenty-six names across six broadly diversified sectors. 

DHTD continues to maintain a defensive stance with a meaningful portfolio cash position. To reiterate previous commentary, we do find the risk-return equation in our current industry and underlying equity holdings to be highly attractive. In other words, we like what we own. Nonetheless, we calculate that our broader universe of names (outside of current holdings) is roughly 24% overvalued at present. Historically, when our work has shown this level of overvaluation, the prudent course has been one of selective caution. The net result is that at this time we do not see enough other opportunities to achieve a fully invested portfolio. 

We would note that two industries, one in financials and the other in consumer discretionary, are on our “buy” watch list but are not yet close enough to suggest a purchase is imminent.

Year to date, our asset management industry leads performance, with the Oil & Gas and Airfreight & Logistics industries not far behind. (Interestingly, asset management also led performance during the month of August.) All of our current industry groupings are reflecting positive double-digit returns for the year except for medical distributors, which is up mid-single digits (though we did just purchase the group of stocks in mid-May).

Integrated Oil & Gas names Chevron and Exxon Mobil are among the top point contributors to the S&P 500 through 2016, however neither is the best performer in the DHTD portfolio year to date. That distinction belongs to Fidelity National Information Services (symbol: FIS) within our Information Technology Services grouping.

One additional note about the tailwind in dividend yielding equities: Strategies focused on dividend stocks have been the beneficiaries of the low fixed income yield environment (currently the 10-year U.S. Treasury yield is near historic lows of around 1.55%), which has forced many investors to seek higher yields. In fact, the relative dividend yield on the S&P 500 versus the 10-year is near 50+ year highs (source: Bloomberg). That being said, the methodology behind our strategy is, in our view, quite different than most income seeking equity strategies. It is important to know that we use proprietary absolute and relative yield analysis on an industry-by-industry basis to draw conclusions around the opportunities for capital appreciation (and the extent of downside risk). In other words, we have a unique, quantitative process for identifying and selecting industries trading at price cycle lows versus those industries that should be avoided.

As a result, our strategy and the resulting invested portfolio can look somewhat different than many dividend yield strategies. We make this point because while we benefit from the interest in dividend payers, we are not concerned over the long term that our strategy may go out of style. Fourteen years (and counting) of track record, as well as meaningful outperformance in rough market environments like 2002 and 2008, give us the confidence in maintaining our disciplined approach.

If you have any questions or would like further details, please feel free to contact us.

Sincerely,

  • Donald L. Hagan, CFA
  • Robert Herman          
  • Jeffrey Palmer
  • Arthur S. Day

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: 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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