Year to date, the Day Hagan Logix Tactical Dividend Strategy has returned +0.72% gross of fees*, and +0.35% net of fees*. August was a frustrating month, as several of our portfolio holdings reported earnings that met or exceeded expectations, only to witness those same names subsequently drop in price due to the negative sentiment surrounding out-of-favor industries. As discussed in more detail below, we are in the midst of one of the most difficult periods for value investors in market history. Nonetheless, even when we include the recent headwinds, the Day Hagan Logix strategy has returned 9.37% annualized gross of fees*, versus the S&P 500 at 7.27% and the Russell 1000 Value return of 7.25%, while maintaining a beta of 0.60 since its inception in 2002. (All numbers are total return.)

As it relates to the most recent earnings cycle for the Day Hagan Logix portfolio, 72% of our names beat consensus revenue estimates and 80% beat consensus earnings per share estimates. Even with this positive backdrop, several of our names reacted negatively. This was a stark reminder that even though domestic large and mid-capitalization equity asset classes are generally viewed as being more efficient, inefficiency can and does thrive. Misinformation and misunderstanding can move names in illogical ways for shorter-term periods, particularly, and currently among value-driven industries that are out of favor. But to be clear: this is where opportunities avail themselves. Ultimately, we continue to strongly believe that our consistency of process (buying names and industries "on sale" with attractive entry points) will provide the upside and risk/reward that our historical experience suggests.

A good example of trough valuations and opportunity relates to the retail sector and how Amazon (AMZN) seems to be viewed versus other retail competitors. While there is no denying the retail paradigm has dramatically shifted, we would suggest that the selling pressure based on Amazon's Whole Foods acquisition (and the perceived impact on Costco and Walmart) or Amazon's selling agreement with Sears on Kenmore appliances (impact on Lowe's) is meaningfully overdone. Jeff Gundlach, a famed bond investor, opined about the Amazon-Whole Foods deal, "how do you red ink your way to profitability?" Appropriately enough, his presentation covering the broader capital markets was titled "Wack-O Season."

Walmart and Costco continue to deliver impressive fundamental strength. During the most recent quarter, Walmart's eCommerce sales were up a solid +60% year over year. Overall, the company had their twelfth consecutive quarter of positive, same-store sales. Walmart currently generates more than twice Amazon's gross merchandise volume and over ten times their grocery sales, including the Whole Foods acquisition. Similarly, Lowe's seems unlikely to be impacted over time by AMZN selling appliances from a rapidly fading brand like Kenmore. In any case, Lowe's broader business model in the home improvement space does not appear to be at risk for Amazon to steal share. Only about 4% of Lowe's sales are online, and 60% of those sales are picked up in the company's stores.

Moody's recently released a thought-provoking report presenting the notion that Amazon may be the weakest of the major retailers from a margin and profitability perspective. The report also questions the number of Amazon Prime members (a major driver of positive Amazon sentiment), believing the number is much lower than has been reported by third parties and well below the substantiated 85 million Costco members.

The hard data behind our carefully screened retail holdings would indicate their demise is greatly exaggerated. There will be winners and losers (names like JC Penney and Sears would not make it through even our earliest of screens), and the structural shift in retail spending is undeniable. We continue to be students of this shift. At current share prices, it wouldn't take much in the way of future results for our retail holdings (and, more broadly, our current portfolio names across sectors and industries) to look highly attractive in the way we measure value and risk return. One example is Kohl's (KSS), which had a solid earnings report in August, beating top line and EPS consensus while showing positive trends online and in stores, but dropping in sympathy with other unloved retail names. Kohl's continues to generate meaningful free cash flow (mid-teens FCF yield) and has a healthy balance sheet evidencing overall financial stability. Based on our objective, yield-based valuation modeling, and fundamental overlay, we feel confident in our entry point(s) for Kohl's and our other retail holdings.

Moving to a broader perspective, value-oriented stock indexes continued to lag their growth counterparts in August. Through August 31, the Russell 1000 Growth index has outperformed the Russell 1000 Value index by over an astounding 14 percentage points. We are currently in one of the longest periods of value underperformance since post-World War II. This speaks to the challenges in 2017 for deep value-oriented strategies.

As the performance difference between value and growth widens, so too do the extreme valuation differences. Blackrock research points out that since 1995, the S&P Value Index P/E (Price/Earnings ratio) has been an average of 55% below the S&P Growth Index P/E. Currently, the S&P Value Index P/E is 70% lower than the S&P Growth Index P/E. The last time this extreme level was breached was in the year 2000 as the Tech Bubble exploded.

Like 2000, it can be argued that investors continue to chase growth.

However, we can learn from history. When looking back to the Great Depression and periodically since then, those predicting the end of value investing (as we know it) have invariably been proven wrong. Couple that with valuation and the factors discussed earlier in this letter, and we believe Day Hagan Logix Tactical Dividend is extremely well positioned for the next several quarters.

Ultimately, as should be the case, we are measured by our performance returns for investors. If there is one clear takeaway from our historical track record, it is that the Logix Tactical Dividend strategy has protected in very difficult markets (versus the S&P 500 Total Return, delivering over 27 percentage points of outperformance in 2002 and over 20 percentage points of outperformance in 2008). The strategy has consistently generated attractive performance with modest risk over market cycles.

Overall, U.S. equity market valuations continue to look quite stretched. For the broad market, our view is that multiple expansion (increasing Price/Earnings and other fundamental multiples) has driven recent S&P 500 gains, rather than broad-based improvement in earnings or cash flows. We note this because market moves to the upside driven by multiple expansion tend to be riskier than market gains supported by earnings or cash flow growth. This underlines an important aspect of our strategy, which is that capital preservation remains the overriding goal, as it has for our more-than-fifteen-year history. We believe this will become even more relevant as the year progresses. We continue to be defensively positioned based on our methodology while maintaining a high level of confidence in our portfolio of companies representing strong value, solid balance sheets and opportunistic windows for accumulation.

The strategy continues to focus on the balance between risk and reward. Over the past 3- and 5-year periods through July 31, 2017, Morningstar ranks the Day Hagan Logix strategy's downside capture (versus the S&P 500) in the top 5 percent versus our peer group (Large Cap Value Category). In other words, the strategy has provided better returns in down markets than 95% of our peers. Over the past ten years, the strategy ranks in the top two percent in terms of downside capture while being in the top one percent of relative peer group performance. This illustrates the historically positive risk-return results of the strategy through the market's ups and downs. Measures of risk and risk-adjusted returns, including Sortino ratios, Alpha and Beta measures are consistently top five percentile as well for the strategy. (Please see disclosures below, reports available upon request.)

From March 31, 2009, through August 31, 2017, during a period which many describe as an extremely strong bull market, the Day Hagan Logix Strategy gained 312% on a gross-of-fee basis and 293% on a net-of-fee basis*, which equates to annualized returns of 14.44% and 13.59%. These returns were achieved while maintaining a strategy designed to be measured in its approach to risk. It is clear that the strategy has participated well in the upside even though growth has been favored over value. Nonetheless, at this point in the cycle, it is our view that value investing is likely to once again gain prominence as the previously cited extremes revert to historical norms. With the approach, our deep value-oriented strategy takes, we are optimistic about the future.

We welcome your feedback and questions and will continue to hold conference calls for investors and potential investors. More generally, pick up the phone or send us an email anytime you would like an additional color.


  • 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.

Print copy of article: Day Hagan Logix Tactical Dividend Strategy Update September 2017 (PDF)

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 a 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.