We enter the final quarter of 2017, following a successful September for the Day Hagan Logix Tactical Dividend strategy.  For September, the Day Hagan Logix strategy returned +4.39 percent* net of fees, versus the S&P 500 return of +2.06 percent and the Russell 1000 Value return of +2.96 percent (all numbers are total return).  September potentially represented the long-awaited reversal in terms of value (Russell 1000 Value) vs. growth (Russell 1000 Growth) performance, a benefit to a deep value strategy like Day Hagan Logix.  However, growth outperformance for the year to date remains significant (nearly 1300 basis points).  Year to date, Day Hagan Logix has returned +5.14 percent* gross of fees, +4.75 percent* net of fees.  Inception to date (2002), Day Hagan Logix has returned +9.62 percent* on an annualized basis, 225 basis points ahead of the S&P 500 and 221 basis points ahead of the Russell 1000 Value, while maintaining a beta of 0.61.

As we have frequently seen over the 15+ year history of our strategy, our positive September results illustrate how quickly attractively valued companies (based on our methodology), within much maligned, recently out of favor industries can bounce back to lead performance. We believe the most recent gains illustrate a small portion of the untapped value that continues to exist in our portfolio.  One example of this was Kohl's (KSS), which declined in early August after its quarterly earnings call, despite reporting strong results that were better than consensus while showing positive online and in-store trends.  Since mid-August, however, the name is up over 24 percent and returned +16.2 percent in September alone.  While Kohl's has at times dropped in sympathy with the broader retail space, it has also consistently generated attractive free cash flow (FCF) yields and shown balance sheet stability.  We believe Kohl's will be one of the brick and mortar players left standing in the long run as they adjust their footprint and continue to grow their online presence.  More recently, their partnership with Amazon, regarding packing and shipping return items in-store for Amazon customers, as well as providing Amazon smart home 'store in store' spaces, seems like a wise strategy for driving higher store traffic.  We continue to have confidence around our entry point for KSS based on our valuation modeling process and believe there is attractive upside ahead in this position (and our retail holdings more generally).

Apache (APA), part of our energy industry exposure, is another name that was up significantly (nearly 18 percent) in September despite significant negative sentiment and indiscriminate selling pressure over the summer for the overall sector.  Apache continues to generate strong cash flows supported by a healthy balance sheet and, importantly, is likely to end the year with higher cash levels and lower debt than was reported in the second quarter.  Our objective, unemotional process is designed to filter out short-term noise and currently identifies Apache as attractively valued within an attractive industry.  We also believe production is at a positive inflection point, and a focus on the Permian Basin (their West Texas, Alpine High project in particular) should drive attractively priced volume growth in the second half of 2017 and into 2018.  We see attractive risk-return for APA moving forward.  While there are many weak names in the energy sector not worthy of our consideration, APA and our other energy holdings had to go through a stringent screening and modeling discipline before being included in the Day Hagan Logix portfolio.

Currently, the Day Hagan Logix portfolio is allocated to six industries (each in a different sector), 26 individual equity holdings, and a sizeable defensive cash position mandated by our risk management process.  Towards the end of the third quarter, we partially reallocated the portfolio by selling holdings in our Information Technology Services/Data Processing industry group while purchasing holdings in our Communications and Networking industry group.  Additionally, we added a position in the Retail/Discount Stores industry group.  Although there had been prior buys and sells during our overall IT Services/Data Processing industry holding period, the four names we recently sold included IBM (IBM), Jack Henry & Associates (JKHY), MasterCard (MA) and Visa (V) (please see our Trade Notification dated 9-26-2017).  Our investment philosophy revolves around finding attractive entry points in companies and industries that are undervalued and selling when our proprietary measure of fair market value is reached.  For the IT Services/Data Processing industry, the Day Hagan Logix process indicated the industry group had achieved fair market value, and three of the four underlying holdings had reached their targets.  Since purchasing the industry in May of 2014, the industry overall returned over +60 percent* versus the S&P 500 total return of +42.3 percent and the Russell 1000 Value Total Return of 32.4 percent+ for the comparable period.

Within our Communications & Networking industry group, we purchased four names, FLIR Systems (FLIR), Cisco (CSCO), Qualcomm (QCOM) and Interdigital (IDCC).  Based on our valuation modeling and fundamental screenings, all four names were clear buys although given trading liquidity, we opted to take a half position in Interdigital.  While the tech sector continues to be largely focused on the 'FAANG' technology stocks (Facebook, Apple, Amazon, Netflix and Google-parent Alphabet), the names we purchased have not recently attracted the same attention.  Given our strategy of buying high-quality names at inexpensive valuations, that suits us well as we were able to find what we view as highly attractive entry points.  On the other side of that continuum, massive inflows into passive indexes seem to have driven indiscriminate buying and perhaps distorted price performance, of FAANG stocks in particular, over the recent past.  In any case, we view the names we now own in technology to have much more compelling risk-return profiles than those higher-profile names.  As the book Contrarian Investing pointed out in the late 1990s, "Investing is a strange business…where the more expensive the products get, the more customers want to buy them."  We view these types of price distortions as an opportunity in using our disciplined, 'weight of the evidence' approach.

More broadly speaking, even with value's outperformance in September, value has lagged growth over an extended period (one of the longest since the late 1940s), and the valuation disparity between the two is by some measures the widest it has been in sixty years excepting the dotcom bubble era.  How quickly that will change is not something we or anyone can answer definitively.  With that said, we do believe there are broader factors that could hasten an extended reversal to value.  More specifically, value generally becomes more attractive to investors when economic growth picks up (since value is harder to find in that environment).  Moving into 2018, not only is nominal and real GDP growth likely to modestly accelerate (and with it the potential for inflation) but more significantly, the odds of some form of fiscal stimulus (e.g., tax reform) are increasing.  All of this could lead to a rapid change in the fortunes of value investing, to the benefit of our strategy.

Finally, we end this letter with a 2014 quote from our friends at Eagle Capital Management, "There are many ways to invest, but most important is to understand yourself, understand your competitive advantage, figure out a strategy and stick to it."  2017 has been an interesting year to say the least but regardless, we have a great deal of confidence in our ever consistent strategy and a lengthy track record over multiple market cycles to show for it.

As always, we welcome your questions and feedback.


  • 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 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 percent management fee per year and has gross performance of 12 percent during that same period, the compounding effect of the quarterly fee assessments will result in an actual return of approximately 10.9 percent. 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 percent.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. 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.

Print Copy of Tech Talk: Day Hagan Logix Tactical Dividend Strategy Update October 2017 (PDF)