Published by Taylor Financial Group
Many of you own Day Hagan Tactical Dividend Strategy in your portfolios. As you will recall, Day Hagan purchases individual dividend paying companies and takes a risk sensitive approach to investing, which is one of the reasons we like them. However, year to date in this “growth” market, the strategy has struggled. Below, we explain some of the “why’s” behind any short-term underperformance.
The Day Hagan Tactical Dividend Strategy is designed to focus on high quality companies within the Russell 3000 with a ten-year history of strong dividends, balance sheet stability, and cash flow generation. Day Hagan’s rigorous screening process of Russell 3000 stocks generally yields a universe of 400 stocks eligible for inclusion in the portfolio. Day Hagan then performs a sector analysis to determine favored sectors of the market and will generally hold between 25 and 45 individual stocks with no industry representing more than 20% of the portfolio and no position representing more than 5% of the portfolio.
The Day Hagan strategy utilizes cash as a hedging mechanism to contain losses (as they did in 2008 when the strategy lost 17.91% compared to the Standard and Poor’s 500 Index loss of 38.49%). They strive to keep losses to a minimum in times of market turmoil, and attribute much of their long-term success to achieving this goal. The strategy returned 10.37% in 2016. More important, over the ten-year period ended February 28, 2017, the strategy has returned 7.03%, net of fees per year compared to the Standard and Poor’s 500 Index return of 7.61%. Not only has the strategy (net of fees) performed in line with the broad market over the long term, it has done so with less volatility and less drawdown as evidenced in 2008 when the strategy lost 17.91% compared to the 38.49% decline of the broad market.
However, year to date as of April 30, 2017, the strategy has returned 0.39% net of fees. These results reflect the highly defensive stance of the portfolio (currently holding over 30% cash). Their methodology indicates that the overall eligible universe of industries and companies are meaningfully overvalued. Keep in mind that their disciplined strategy only allows them to buy and hold positions trading at trough valuations with significant upside potential. The goal is to accumulate companies that are trading inexpensively, and sell these positions when they achieve fair value.
Retail – A Work in Progress
Day Hagan purchased four stocks – Costco, Wal-Mart, Kohl’s and Target, as their analysis indicated that these companies and the industry were undervalued. As of May 3, 2017, Costco and Wal-Mart were up ~20% and ~11%, respectively, since purchase in October of 2016, and Kohl’s and Target were down, respectively, ~9.2% and ~16.4% since purchase in October of 2016. However, based on analysis by Day Hagan, Kohl’s and Target are being priced as if their sales and margins are going to collapse, and this is extremely unlikely. Neither company has issues with solvency or liquidity and the reported accounting is sound. Often times, it is the companies that are smothered in pessimism, even though they maintain solid businesses, that offer the potential for healthy profits for the patient investor. Experience has also shown them that reversals in industry grouping trading at trough valuations tend to happen swiftly, and positioning is therefore critical.
On May 11, 2017, Day Hagan purchased a basket of short-duration, lower volatility, income-oriented ETF’s to enhance income as the portfolio is holding just over 30% in cash. The three ETF’s purchased (FLOT, BIL, MINT) target the use of investment-grade securities and are expected to provide a higher return than traditional money market funds. Day Hagan views these ETF’s as representing part of the strategy’s cash holdings. All of the ETF’s purchased reside within the Morningstar Ultrashort Bond category. Day Hagan continues to actively seek individual stock opportunities in which to invest that meet their risk / return requirements.
In short, we continue to believe in the managers as part of a diversified portfolio. If you have any questions about this strategy or would like to schedule an appointment, please contact us today.
Sources: Interim Update: A discussion of why we continue to hold retail and energy stocks, by Day Hagan Tactical Dividend, May 3, 2017.
The Standard & Poor’s 500 Index – Capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
No strategy assures success or protects against loss. Investing involves risk, including possible loss of principal. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Investment advisory services offered through CWM, LLC, an SEC Registered Investment Adviser.
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