As we write this letter in early April, snow sits on the ground in many parts of the United States. Still, happily, we know spring weather is coming. We are excited about how the Day Hagan Logix Tactical Dividend strategy is positioned moving into spring and summer and believe patience in our underlying, undervalued holdings will be rewarded. For the month of March, we were roughly in-line with our Russell 1000 Value benchmark, -1.88 percent* vs. the Russell at ‑1.76 percent, and ahead of the S&P 500 at -2.54 percent; all numbers are total return and gross of fees. At -3.42 percent* year to date, while we are marginally lagging the Russell 1000 Value at -2.83 percent, we are meaningfully ahead of dividend-based benchmarks like the S&P 500 Low Volatility High Dividend Index at -6.0 percent (as well as the S&P 500 Value at -3.6 percent). Over the last twelve months, we have outperformed the Russell 1000 Value, with the strategy returning +7.43 percent* gross of fees vs. the Russell 1000 Value Index at +6.95 percent.

From a sector perspective, the month of March saw an (early) positive reversal in some of the high conviction industries we own, more specifically Energy and Real Estate. As an illustration, while the S&P 500 Energy index is still -5.9 percent year to date, it was up +1.7 percent in March (source: Bloomberg). This March sector performance mirrored the performance of our own energy holdings during the month. The REIT sector, as measured by the S&P Sector ETF, is -5.7 percent year to date but was up +3.2 percent in March. Note that we purchased specialized REITs in March after much of the decline had already occurred, taking full advantage of the turn and buying in at what we view as trough valuations. We discuss this in more detail below. Interestingly, all of the S&P sectors were negative in March except for Energy, Real Estate, and Utilities.

Our diversified Energy holdings have average price targets indicating potential upside of close to 68 percent based on our measures of fair market value, illustrating how attractive they are at current prices. While our objective discipline is based on absolute and relative dividend yield valuations (and in turn identifying price cycle lows), there are confirming macro points that also merit optimism for the energy sector moving forward. Of note, the historically high, positive correlation between the price of oil and sector stock performance moved to negative over the past year as oil prices recovered from early 2016 lows. In other words, even with the price of oil moving higher, energy stocks underperformed the broader markets. We believe this is a temporary dislocation and that our energy holdings will “catch up” with the price of oil (which, with current demand/supply dynamics, may move even higher), particularly as the companies we own have meaningfully lowered their cost structures and are now generating meaningful free cash flow. We believe that a likely byproduct of the meaningful free cash flow generation from our energy stocks will be shareholder-friendly behaviors, including stable and potentially increasing dividends and additional share buybacks, for which many investors have been lobbying as a way to increase earnings growth per share and ultimately stock prices.

Moving to our purchase of Specialized REITs, our buys in early March were consistent with our approach to identifying trough valuations. Since purchase, we have achieved positive performance for the overall REIT holdings during the month. In fact, REITs led all of our owned industry groupings from a return perspective in March. We also believe, again based on our objective, weight-of-the-evidence process, that the holdings that met our purchase criteria will outperform the broader REIT index over time. We purchased four names: Public Storage (PSA), Welltower (WELL), American Tower (AMT) and Ventas (VTR). Two of these names are healthcare-related (WELL, VTR), one is focused on ownership and operation of self-storage facilities (PSA), and one leases space on communications sites (including towers) primarily to wireless providers and broadcasters (AMT).

These four REITs screened extremely well on our yield-based valuation methodology and fundamental overlay evaluations. Prior to our purchase, the healthcare REITs (WELL, VTR) had previously been hit particularly hard from a price perspective. However, we believe WELL and VTR at current levels represent an overreaction and are the most attractive names from a risk-return perspective within the healthcare REIT subgroup. WELL, for example, is a major player among healthcare REITs, with about 3 percent of the massive healthcare real estate market. With a flexible and stable balance sheet, as well as an evolving macro healthcare backdrop where owners and operators are looking to partner, WELL is nicely positioned to take advantage of strategic M&A opportunities. VTR, with a similarly attractive financial profile, is also taking advantage of opportunities and partnerships. Life science innovation centers within universities are a new growth area for VTR, including as one example an 80 percent pre-leased facility at Brown University. Broader demographic trends and expanded population access to healthcare should provide tailwinds for both names moving forward, with various headwinds sufficiently accounted for at current prices.

PSA is an entrenched leader in the supply-restricted, self-storage industry. With modest balance sheet leverage and meaningful cash, the company should continue to build on its leadership via reasonably priced acquisitions in a fragmented industry. The company already has a presence in all major U.S. markets and is actively growing its European presence. AMT, a leader among the communication tower companies, has scale and balance sheet strength, making it in our view the most stable of these tower companies. Massive growth in wireless and mobile data demand, as well as significant operating leverage, (each additional tenant on a tower or communication site has minimal associated cost) make the company a free cash flow “machine.” The company has increased their dividend twenty times in the past five years and just authorized a new, $2B stock buyback.

The common themes of our specialized REIT holdings are fundamentally strong names with leadership in their sub-industry areas of focus. We believe they are meaningfully undervalued (with a potential rise in interest rates already negatively priced in, fairly or not). Our price target upside for the portfolio’s Specialized REITs industry grouping, again based on our measure of fair market value, is over 40 percent.

Finally, a short follow-up on an industry we sold out of in mid-January. As described in our January 17, 2018 Trade Notification, our Asset Manager holdings were sold for an average overall return of more than 60 percent* since the original purchases in February 2016 (this also includes other asset management names that were bought and sold throughout the holding period). After the sale of the last three holdings, those three stocks have since declined an average of 15 percent through the end of March. This leads us to make two points. First, we sold our asset managers at the point our work showed them to be fully valued—when risks had increased to a point where they outweighed reward. When our work mandates we sell, we do not hesitate to take our profits and move forward. Admittedly, we can be early. Yet it is important to know that we do not seek the last dollar of profit in an up move, as we believe that last dollar represents the riskiest dollar of the trade. This is not a subjective exercise for us, rather it is mandated by objective, quantitatively driven criteria that have been in place for over 16 years. Second, as of March, the Financials sector represents about 27 percent of the benchmark Russell 1000 Value Index market value and about 15 percent of the S&P 500 index market value. Following the sale of Asset Managers, we currently no longer hold financials in our portfolio. Rather, we are overweight what we view as high potential upside sectors like Real Estate, Energy and others. We think this provides further differentiation versus our benchmark that will serve our clients well through the balance of 2018.

Here’s to a happy spring and summer. Please don’t hesitate to call or email us any time with questions or comments or even if you just want an update.


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

Print Copy of Article: Day Hagan Logix Tactical Dividend Strategy Update April 2018 (PDF)

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 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.