For the first quarter of 2014, the Logix composite was +0.81% gross of fees. Investors in the U.S. equity markets rewarded growth factors over value early in the quarter, with value turning ahead in March. We expect this value trend to continue with an improving economy. While the Logix strategy takes a unique approach to finding value among dividend paying equities, its performance during the quarter was consistent with our foundation of being a value oriented, dividend equities manager focused on high quality companies.
Through the first quarter, Logix composite numbers are +21.04% gross of fees on a one year basis and 10.01% annualized since inception in April 2002. Since its inception, Logix has demonstrated measurable outperformance with modest volatility versus its benchmarks (beta of 0.60 against the Russell 1000 Value). Complete composite portfolio risk-return data is provided in the Logix Summary page at the end of this report.
We made several portfolio moves during the quarter. A third healthcare industry, Healthcare Services & Supplies, was added while holdings within Healthcare Distributors were reduced. We exited Semiconductors/Semiconductor Equipment, after a holding period of about 2 ½ years, realizing attractive, long-term gains. Restaurants and Oil & Gas Integrated industry exposures were both modestly increased; Retail Food & Drug was trimmed. The resulting current Logix portfolio is broadly diversified across 8 industries. The healthcare sector, across the three industry groupings, represents 26% of the invested portfolio. Consumer staples, consumer discretionary, industrials, and energy industries round out the other Logix portfolio investments.
Logix cash positions remain elevated as a percentage of the portfolio, growing slightly during the quarter. We believe we are well positioned strategically given our invested portfolio’s (industry) entry points as well as overall sector mix, however we are cautious of the overall valuation of our broader universe of names. As a result, we are comfortable at this point maintaining current levels of cash.
We enjoy reading other investment managers’ quarterly letters and one from Eagle Capital Management earlier in the year stood out to us as being relevant. In addressing how they have maintained investment performance over the years, they offer, “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.” Although Eagle has a different investment approach than Logix, we agree with the sentiment. Since 2002, Logix has consistently maintained an objective, repeatable valuation approach using historical absolute and relative dividend yields by industry to make buy and sell decisions. The concept around the relationship between price and yield movement is simple, our primary competitive advantage is a complex industry-based model framework generating portfolio decisions. In terms of understanding ourselves and our risk tolerance, we are most proud of maintaining top one percentile performance since inception versus our peers (as measured by Informa) but always with a focus on capital preservation, maintaining downside capture percentages of around 55%. We are pleased to report that we are now listed on Morningstar as a separate accounts manager, with a 5 star, 5 year rating, showing low risk and above average return.
Although we consider our methodology and the resulting portfolio names to be somewhat different than other dividend strategies, we are aware of the broader dividend trends that impact us. Although inflation does not appear to be an immediate (or 2014 anyway) threat, there have been multiple research pieces on how dividend growth has offset inflation historically. More recently in the popular press, The Wall Street Journal wrote an interesting piece suggesting that since 1970, S&P 500 companies have grown dividends twice as fast as the rate of inflation. Also worth noting that since the early 1980’s, the number is 2.8 times and since 2010, eight times. All in all, while we look at dividends as a means to provide yield-based valuation, the cash flow and the inflation hedge are attractive incremental benefits.
Wishing you a happy and productive spring.