Happy New Year! As we look back on 2017 and enter 2018, it is readily apparent that we are living in the midst of interesting times. For the Day Hagan Logix Tactical Dividend strategy, 2017 presented periodic headwinds, though ultimately it was a year that illustrated how our discipline and consistency of process can reward investors. For the month of December, Day Hagan Logix returned +3.18%*, generating a +6.84%* return for the quarter and +12.34%* return for the full year (numbers are gross of fees, total return), despite holding a defensive cash position throughout the year.

The December passage of corporate tax reform fostered a continuation of the mean reversion from growth back to value investing that, in our view, began in earnest last September. For December, the Russell 1000 Value Index outperformed the S&P 500 Total Return for the month with returns of +1.46% and +1.11%, respectively. However, both indexes lagged the Day Hagan Logix strategy return of +3.18%* for the month, providing another data point showing that our dividend yield-based, value-oriented approach remains differentiated from its benchmarks. From an upside capture perspective, the Day Hagan Logix Tactical Dividend Strategy captured about 90% of the return of the Russell 1000 Value Index return for 2017, while mitigating risk both through the use of cash positions and our multifaceted buy and sell disciplines.

Our holdings within the retail industry provide a good illustration of the kind of year 2017 was. Kohl’s (KSS), a name that struggled with negative sentiment during a large part of the year, came roaring back in the fourth quarter, returning just over +20%*. The unfavorable noise around Kohl’s (and at times, the retail space in general) appeared daunting prior to the stock finally moving higher. Our work quantitatively, and correctly, identified the stock’s attractive risk-return potential throughout the ups and downs, with the weight of the evidence in our process supporting continued ownership.

Tractor Supply (TSCO) is another name that initially struggled in 2017 and we felt our entry point in late October was compelling. Since our purchase, TSCO is up over +26%*. Currently, our collective retail holdings are an assorted mix (we affectionately refer to it as a “motley crew”) that returned over 19%* in the full year 2017. Nonetheless, we are fully cognizant of the growing drumbeat around Amazon and the potential death of brick and mortar retail (although investors that bet against retail by purchasing the new ETF which shorts retail [Ticker: EMTY] when it launched in November are not very happy at this point). We still, however, believe there are pockets of deeply attractive, and at times idiosyncratic, retail value that we have identified using our differentiated approach. To be clear, we do not purchase a name or industry simply because it appears cheap. It must meet our stringent valuation criteria as well as be supported fundamentally by a strong capital structure and long-term cash flow generation.

From an industry perspective, our Airfreight & Logistics and Asset Management holdings led full year 2017 performance while our Energy industry names trailed other industry groupings. We expect better things from energy stocks in the year ahead. Oil prices hit two-year highs in 2017, as WTI Crude prices closed the year at over $60 per barrel for the first time since mid-2015. Ned Davis Research noted that 2017 was the first year since 2002 that crude oil prices were up for the year while the S&P Energy Sector was down. With tightening supply and solid demand providing a favorable backdrop, we believe the energy companies we own are poised to generate increasing levels of free cash flow as well as the ability to run their equity value higher based on current oil prices. Our process shows that our energy holdings remain undervalued and fundamentally strong.

Moving into 2018, we are currently at the low end of our historical number of holdings, with 24 (across six industries) after buying and selling two names each in December. We anticipate that there will be more opportunities to reposition the portfolio during the first quarter but continue to see our existing allocations as attractive. Based on our work, there are not yet enough attractive industries and underlying names to be fully invested.

An astute advisor recently asked if it would take a market downturn for our work to show more potential buy candidates. While that idea is partially correct, our experience has shown that within our eligible universe, there is ongoing sector and industry rotation occurring. Periodically, different industries will move to levels which we believe provide attractive entry points, regardless of the direction of the broader markets. In other words, while a broad market decline would certainly increase the number of available buy candidates, we consistently see sectors and industries moving to levels that provide us with investment opportunities as well—even with the broad market in an uptrend. At this point, we do see new industries and names nearing attractive levels.

Given our dividend yield-based focus, we have also been asked (more frequently in the current lower rate environment) how we anticipate the portfolio holding up when rates begin to rise. First of all, contrary to conventional wisdom, history has shown that dividend-paying equities can make sense in a rising rate environment, due to the typically lower beta and cash payouts of a well vetted dividend-paying stock. It is important to note, however, that the Day Hagan Logix strategy evaluates dividend yield for objective valuation purposes, with the resulting income serving as a by-product. Furthermore, our holdings are typically sporting historically low valuation multiples (trading at low prices relative to intrinsic value), and we suggest that when interest rates rise, companies that have excessively high multiples typically experience a higher rate of multiple compression. Given these factors and the many evaluation criteria we use, our view is that a rising rate environment will not, in and of itself, negatively impact our portfolio performance. As evidence of this we point to three recent, significant increases in interest rates and our related performance for those periods:

  • 5/01/2013-12/31/2013: 10-year Treasury from 1.6% to 3.0%; Day Hagan Logix performance +18.8%*
  • 1/30/2015-6/10/2015: 10-year Treasury from 1.7% to 2.5%; Day Hagan Logix performance +4.2%*
  • 7/08/2016-3/13/2017: 10-year Treasury from 1.4% to 2.6%; Day Hagan Logix performance +4.4%* (Gross of fees)

We frequently talk about the Day Hagan Logix Strategy as a longer-term, all-seasons portfolio, referencing historical upside and downside capture (nearly 77% upside capture and just over 52% downside capture, since 2002 inception, versus the S&P 500). In other words, along with our upside capture, we take downside protection very seriously. It is this trade-off that has delivered long-term outperformance. What this means for our investors in terms of actual dollars can be illustrated by looking back over the last ten years.

Starting with $10,000,000 on December 31, 2007 (just before the 2008 bear market) and through December 31, 2017 (a 10-year period) the Day Hagan Logix strategy would have grown to roughly $27,500,000, compared to about $22,800,000 for the S&P 500 and $20,000,000 for the Russell 1000 Value. Looking at it in actual dollar terms may provide a different and somewhat striking look at the value of our strategy for investors in the context of an appropriate upside/downside capture balance.

This past October, we wrote, “we remain confident in portfolio positioning, with significant pent-up value in our industries/names.” The subsequently strong November and December returns showed our confidence was not misguided. As we move into 2018, we do so with continued confidence and conviction in a process that has meaningfully outperformed our benchmarks, with markedly lower risk, since our 2002 inception.

Wishing you all the best in 2018, and please do not hesitate to call or email us with questions and comments.


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

PDF Copy of article: Day Hagan Logix Tactical Dividend Strategy Update January 2018 (PDF) 

Note: The Day Hagan Logix Tactical Dividend Strategy Net Returns through 12-21-2017: YTD 11.77%, Fourth Quarter 6.67%. See disclosure regarding net return calculations below. For 2017, the Russell 1000 Value Index Return was 13.66% and the S&P 500 Total Return was 21.83%. 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.


All separate account performance data is reported as a "composite" of similarly managed portfolios. As such, investors in the same separate account may have slightly different portfolio holdings because each investor has customized account needs, tax considerations and security preferences. The method for calculating composite returns can vary. The composite performance for each separate account manager may differ from actual returns in specific client accounts during the same period for a number of reasons. Different separate account managers may use different methods in constructing or computing performance figures. Thus, performance and risk figures for different separate account managers may not be fully comparable to each other. Likewise, performance and risk information of certain separate account managers may include only composites of larger accounts, which may or may not have more holdings, different diversification, different trading patterns and different performance than smaller accounts with the same strategy. Finally, may or may not reflect the reinvestment of dividends and capital gains.

Gross-of-Fee returns are collected on a monthly and quarterly basis for separate accounts and commingled pools. This information is collected directly from the asset management firm running the product(s). Morningstar calculates total returns, using the raw data (gross-of-fees monthly and quarterly returns), collected from these asset management firms. The performance data reported by the separate account managers will not represent actual performance net of trading expenses, management fees, brokerage commissions or other expenses. Management fees as well as other expenses a client may incur will reduce individual returns for that client. Because fees are deducted regularly, the compounding effect will be to increase the impact of the fee deduction on gross account performance by a greater percentage than that of the annual fee charged. For example, if an account is charged a 1% management fee per year and has gross performance of 12% during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9%. Clients should refer to the disclosure document of the separate account manager and their advisor for specific information regarding fees and expenses.

Down Capture ratio measures the portion of bear market movements that the money manager(s) captured. Ideally, the down capture will be less than 100%.Alpha measures the difference between the separate account's actual returns and its expected performance given its level of risk (as measured by beta). Alpha is often seen as a measure of the value added or subtracted by a money manager. The higher the alpha, the better the manager is at selecting stocks. Specifically, measures the manager's excess return over and above that predicted by their benchmark and beta. Calculated for separate accounts with at least a three-year history. Beta is a measure of a separate account's sensitivity to a benchmark (i.e. often the general market as represented by S&P 500). A portfolio with a beta greater than one is more volatile than the market, and a portfolio with a beta less than one is less volatile than the market. Calculated for separate accounts with at least a three-year history.