Greetings. Year to date through October, the Day Hagan Logix Tactical Dividend Strategy is +4.15%* gross of fees and +3.72%* net of fees. The environment for value investors continues to be challenging, and this was especially true at the end of October. Yet we continue to generate positive returns for the year while maintaining a significant focus on capital preservation and risk management.

Importantly, our work indicates that there is meaningful upside in our current portfolio of value-oriented holdings. However, our work also shows that outside of our portfolio, the overall universe of eligible equities is nearly 30% overvalued. Historically, this has been an indication of a broadly overvalued market, and we are content to be defensive near term. As a result, while we do envision a sharp value turnaround that is especially relevant to a strategy like ours, we are keenly aware of periods like 2002 and 2008, where the Day Hagan Logix Tactical Dividend strategy vastly outperformed in a down market. For example, in our inception year of 2002, we generated a gross return of +4.71% versus the S&P 500 at -22.31% for the partial year. During the financial crisis, we outperformed the S&P 500 by over 20 percentage points in 2008. It’s this kind of downside protection that has contributed to meaningful outperformance since inception, with a beta of 0.61.     

While this has been a historically difficult year for value, we do not think “this time is different,” and that value is somehow permanently out of favor. Like David Einhorn, founder of Greenlight Capital, recently observed as it relates to growth’s outperformance over value, “The last time it happened… everyone was talking about eyeballs as the new paradigm for investing. That didn’t end very well [for growth investors].” This has been an atypical market year beyond growth versus value. Year to date, there has not been a market move of greater than 2% in either direction. By comparison, in 2009 there were 55 of them (source: Bloomberg)! We do not expect this to last.

Our current portfolio holds fewer positions and a higher cash allocation than our historical average but remains diversified across industries and economic sectors. Our recent move into the Communications & Networking industry in late September has proven to be beneficial. In just over a month, we have generated over 6%* in returns, led by FLIR Systems (FLIR). FLIR’s gains over the last month are a good reminder that some names are recognized as undervalued more quickly than others, and trying to attach a specific timeline to the trajectory of any holding is somewhat of a fool’s errand.

At the end of October, we sold four names and purchased two, modestly increasing our level of cash in the portfolio. Two of the four sales involved names hitting our clearly-defined price targets: Chevron (CVX), generating about +44%* total return since January 2016 purchase, and Wal-Mart (WMT), returning over +30%* with a one-year holding period. Of the other two names, Owens & Minor (OMI) hit our multidimensional stop loss, a part of our risk management paradigm in limiting downside capture. Waddell & Reed (WDR) reported a strong quarter but cut their outsized dividend (previously yielding 8%, post-cut yielding 5%) which is an automatic sell in our discipline. For WDR, the cut was not an issue of financial strength but rather management taking the opportunity to increase financial flexibility and announce a share buyback. While neither of these occurrences (hitting the stop loss or a dividend cut) happens frequently within our invested portfolio, it is important to note that they are an expected element of our methodology in seeking to buy names and industries at trough valuations. 

Our buys in late October offset our sales in retail and energy. Halliburton (HAL) is an oil-related service and equipment company that should benefit from rising U.S. shale production. The company is also seeing pricing strength, with increases of up to 20% based on a fleet that is already sold out into 2018, and domestic land revenue is growing several hundred basis points faster than their U.S. land rig count as a result. HAL is adept at balancing capital spending with technology leadership in a highly competitive business. Based on our strategy’s disciplined, “weight-of-the-evidence” process, the name is highly attractive. Similarly, Tractor Supply (TSCO) is a clear buy within our retail industry holdings. TSCO has a differentiated offering serving the rural lifestyle and is somewhat less threatened by Amazon in terms of its markets and product mix than other retailers. As evidence of this, TSCO is showing accelerated same-store sales growth (+6.6% in the most recent quarter). Given the markets they primarily serve, TSCO has plenty of room to continue sensible, profitable store growth with a goal of 2,500 stores from 1,595 currently.

The last few trading days of the month were difficult for the strategy and active value managers more generally.  In the specific context of our strategy, buying out-of-favor names/industries can involve being early until the market recognizes meaningful, underlying value. 2017 has been a perfect storm of many factors, and chief among them is Amazon’s expression of interest in particular industries or sub-industries and the subsequent swift and dramatic reaction in related names. Grocery (and the Whole Foods acquisition) is one specific example impacting names like COST. AMZN’s possible intentions related to air and ground freight is another. Finally, towards the end of October, AMZN’s interest in pharmacy again came to the forefront, which impacted our Medical Distributors.

Regarding our medical distributors, starting with the afternoon of October 26, President Trump’s comments on going after bad actors related to the opioid epidemic, coupled with more color on AMZN’s potential entry into the pharmacy supply chain, drove down our names. While Amazon has the potential to make an impact, their specific intentions are at this point speculative. Most knowledgeable pharmaceutical industry players/analysts would tell you that it would take AMZN at least a decade to approach 10% market share given the complexity of the business, and even then they would need a major acquisition in the space to be competitive. We are not looking to minimize Amazon’s impact on certain industries, but given a complex and efficient drug distribution market with many long-term, entrenched supplier and client relationships, their success over existing players seems highly uncertain and in our opinion unlikely.

Our medical distributor's holdings, which include two of the largest three players (ABC, CAH), are currently reacting to a lot of noise. We believe an unrealistic AMZN impact is largely already factored into current prices.  We also believe the market is not appropriately factoring in the underlying value of our holdings in this industry.  One tailwind for larger medical distributors is the current trend to break out specialty drugs from branded drugs to gain pricing power and expand margins. Given the significantly faster growth rate of specialty drugs, any pricing move higher in this category can have a meaningful impact on margins and company profitability. In addition, demographic and overall drug use show that this is a growing market, pharmaceutical spending will continue to increase, and existing medical distributors (both market leaders and niche players) will reap related benefits. We have historically bought and sold the Medical Distributors industry grouping multiple times, returning over +60%* in the process.

Despite generating positive returns and remaining vigilant as it relates to downside protection, 2017 to date has been a frustrating year on a relative basis. That being said, our strategy has seen periods of relative underperformance before, and we remain confident in portfolio positioning, with significant pent-up value in our industries/names. We also recognize that as quickly as things turned at the end of October, they can also turn in our favor.

We will be holding a webinar to discuss our most recent trades on November 9 at 10:00 am EST. More specific information is forthcoming via email. As always, we appreciate your support and encourage your comments and questions.


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

PDF Copy of article: Day Hagan Logix Tactical Dividend Strategy Update November 2017 (PDF) 

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.

 All data is based on the most recent information available to Morningstar. Data is collected via a monthly survey of the money managers in our database. In no way does Morningstar guarantee the accuracy, completeness or timeliness of this information or does it independently verify this information. Subject to the level of response from the money managers that are surveyed, the Comprehensive Report is designed to fulfill the applicable Global Investment Performance Standards (GIPS) for separate accounts from the CFA Institute. If a separate account data element is populated with the characters "DNP" this means the separate account firm "does not participate" or did not provide that particular data set to Morningstar in the most recent monthly survey. Please note: the performance data given represents past performance and should not be considered indicative of future results. Principal value and investment return will fluctuate, so that an investor's portfolio when redeemed may be worth more or less than the original investment. A separate account is not FDIC-insured, may lose value and is not guaranteed by a bank or other financial institution.

 Morningstar Rating™ is calculated on a quarterly basis for separate accounts with at least a three-year history. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account's monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the bottom 10% receive one star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and 10-year (if applicable) Morningstar Rating metrics. Morningstar will not calculate ratings for categories or time periods that contain fewer than five separate accounts. There are some differences between the separate account rating methodology and the rating methodologies of other investments. All separate account performance data is reported to Morningstar as a "composite" of similarly managed portfolios. Separate accounts are based on total returns that have not been adjusted for investment management fees, and the returns are not tax adjusted for accounts that invest in municipal bonds. To ensure that ratings are fairly assigned, ratings are calculated only for firms that indicate their composites are calculated according to GIPS from the CFA Institute. Approximately 90% of the firms in our database submit composites that are depicted as GIPS compliant.


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.

Sortino Ratio is similar to Sharpe ratio except it uses downside risk (Downside Deviation) in the denominator. Since upside variability is not necessary a bad thing, the Sortino ratio is sometimes more preferable than Sharpe ratio. It measures the annualized rate of return for a given level of downside risk.

Sharpe Ratio measures risk-adjusted return by using standard deviation and excess return to determine reward per unit of total risk. Use of standard deviation as a measure of risk assumes the separate account has not been fully diversified to eliminate non-systematic risk as a factor of investor concern. The higher the ratio, the better the fund's risk-adjusted performance. Should be compared to other managers and the benchmark.