DAY HAGAN TACTICAL DIVIDEND STRATEGY UPDATE FEBRUARY 2017

For the month of January 2017, the Day Hagan Tactical Dividend Strategy (DHTD) returned -0.52% gross and -0.57% net. The Russell 1000 Value total return was +0.71% and the S&P 500 total return was +1.90% in January. Since inception in March 2002, the DHTD strategy has had an average annual return of +9.66% gross (+8.53% net), which is 240 basis points ahead of the Russell and 277 basis points ahead of the S&P 500 on an annualized basis (DHTD numbers are relative to the gross total return). The long-term outperformance for DHTD has been accompanied by risk measures indicating that the returns were achieved with markedly less volatility. An illustration of this significantly reduced volatility is portfolio Beta of 0.62 versus the S&P 500 benchmark.

Although we had a strong 2016, the portfolio has had a slow start for the first month of 2017. For example, comments from the new administration related to border tax proposals (potentially increasing corporate tax rates for large importers) have created near-term headwinds for our Discount Stores industry holdings. Importantly however, we are currently viewing the industry's negative reaction as a short-term blip rather than a fundamental shift in the attractiveness and valuations for the positions we hold. The positions we hold in the industry share the attributes of healthy balance sheets, meaningful cash positions (even more important in the midst of uncertain times), and substantial free cash flow generation. For example, free cash flow yields on the names in our Discount Stores grouping are as high as 23%. 

We would also note that our forward-looking assumptions around all of our portfolio names with regard to top and bottom line evaluations of fundamental trends and operating returns remain intentionally modest. In other words, we incorporate a significant degree of safety into our analysis of potential opportunities versus potential risks.

Based on our time-tested and disciplined valuation process, we currently calculate that our portfolio's holdings have an average price target that is nearly 45% above current levels. While our price target methodology is designed to identify a company's "fair value" or "intrinsic value" as we measure it, when those targets are likely to be achieved is imprecise. And, of course, the operating environment can shift as well, causing our targets to realign higher or lower. That being said, while the positions we currently own are deemed to have significant upside potential, our work further shows that our eligible universe of names (based on our initial evaluation process) is overvalued and therefore evidencing higher risk. Simply put, we are confident in the operating strength and upside potential of our currently held names. However, based on our methodology, we continue to hold a meaningful cash position given the overvaluation of our broad universe and the lack of attractively rated "buy" industries.

Historically, we have seen periods of outperformance and underperformance in our portfolio. Our measurable outperformance over time (nearly 15 years) has come from healthy upside capture (~75%), but more importantly, limited downside capture (~50%). Sticking to our discipline gives us the confidence past, present and future that we will preserve capital and produce absolute returns. Even with the recent, less attractive, 30-day period in January, our extensive work on a day-to-day basis leads us to conclude that outperformance in 2017 remains a rational expectation.

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

Sincerely,

  • Robert Herman
  • Donald L. Hagan, CFA
  • 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: *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.