DAY HAGAN TACTICAL DIVIDEND STRATEGY UPDATE MARCH 2017
The Day Hagan Tactical Dividend Strategy (DHTD) returned +2.78%* gross (+2.75%* net) during the month of February versus the S&P 500 at +3.97% and the Russell 1000 Value at +3.59%. All numbers are total return. The positive returns for the month came as the portfolio maintained a defensive stance based on the dictates of our disciplined methodology. As of this writing, we remain defensive and hold a meaningful cash position.
During the month, Medical Distributors led industry performance with Energy lagging; Costco (COST) and Waddell & Reed (WDR) were the best performing individual names in February. Year to date, Asset Management was the top performing industry; however, Cardinal Health (CAH) and AmerisourceBergen (ABC), both from the Medical Distributors industry, outperformed all other equities.
Early in the month of February, we sold all of our positions in the Software industry while concurrently modestly increasing our allocation to the Asset Management industry. Among the software names we sold, Oracle was still in a relatively attractive buy range, but the other positions within the industry had approached fair market value as we measure it. As a result, the lack of available diversification and replacements alongside the extended valuations of the industry directed us to an overall sell decision. Since our original purchases of our Software industry positions in August 2015, the average return for our holdings was nearly 25%*. We continue to hold our positions within the Information Technology Services industry, which also resides in the technology sector.
Overall, the DHTD portfolio now holds 6 industries and 25 names, the low end of our historical range of holdings. It is important to note that we review our portfolio holdings on a daily basis, adjusting and incorporating all new information, resetting targets and consistently evaluating opportunity and risk. Currently, our work shows that while most stocks are significantly overvalued, our holdings have more than a 45% average upside before achieving our calculations of their Fair Values. In other words: 1) we are finding opportunities, but 2) there aren't many that currently meet our strict criteria. Historically, when this has been the case, it has proven better to continue to maintain our discipline and only own stocks that meet our standards, rather than lower our standards to fill up the portfolio. We look forward to investing our cash, but only when it is warranted.
The DHTD valuation approach is somewhat unique in that it begins with a sophisticated, proprietary modeling process that evaluates historical returns on the aggregate industry's operating business (including dividend yields). Our historical track record confirms that our process objectively and successfully identifies longer-term industry-based price cycle highs and lows. The importance of getting into industries at price-cycle lows can be confirmed by the strategy's upside (~74%) and downside (~50%) capture percentages since inception. As importantly, the point of the modeling is to find industries (and underlying names) at true, trough valuations that have the fundamental foundations already in place to eventually allow us to later sell as the industry's price cycle returns to fair market value. Then, once we're on the right side of an industry trend, the individual stock selection process takes over.
A meaningful part of our risk management process involves diversification. In other words, we will not buy one, two or even three names within a single industry. There must be four or more names in an eligible buy industry to purchase at a given time. This also means that on the front end of our evaluation process, an "orphaned" name that is not part of a buy-rated industry is not eligible for consideration. Our view is that our "industry-first" approach leads to additional risk diversification and a more thorough screening of the underlying names in an industry.
In our search for trough valuations, we expect that we will often be taking contrarian positions in industries and individual companies. As Mr. Buffet would say, "Be fearful when others are greedy, be greedy when others are fearful." If we want it cheap, and even though our valuation process is complex and detailed, we know that many investors will likely have built-in negative attitudes and expectations. That's fine with us—as it generally gives us very attractive entry points. While we can't pretend to know what an unloved name or industry will do next week or next month, our track record would suggest we have a strong sense of strategic long-term upside versus downside risk.
We believe our current portfolio is well positioned to weather the storm, while realizing attractive absolute returns over time. The industries and names we now own give us confidence that the process we have followed over the last fifteen years will continue to serve us well.
As always, if you have any questions or would like further details, please feel free to contact us.
- 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.