As we look back on 2013, we are pleased to report the Logix composite portfolio returned +35.7% for the year and +8.1% during the fourth quarter gross of fees. By comparison, the S&P 500 and Russell 1000 Value, the broad-based indices we benchmark ourselves against, produced total return, full year numbers of +32.4% and +32.5% respectively.
Annualized returns for the Logix composite since 2002 strategy inception are +10.2% (versus the S&P 500 +6.3% and Russell 1000 Value +6.9%), with modest volatility (for example, beta of 0.59 against the Russell 1000 Value). For risk return data since inception, click here.
For a yield-based equities strategy diligently focused on downside protection, 2013 was an atypical year. In the context of outperforming the high-flying, positive indices over the past 12 months, we do not expect nor are we seeking this type of upside moving forward. Historically since the inception of Logix, our downside capture ratio has been around 55%, with upside capture in the 70%+ range, and we have seen drastic outperformance in difficult market years like 2002 and 2008 based on our methodology. As a result, it is worth taking a step back to review our 2013 performance and discuss positioning from a risk-return perspective moving into 2014.
The year for Logix started strong with first quarter performance of +13.1%. Our significant concentration in defensive sectors, primarily healthcare and consumer staples, led to the outsized returns in underlying Logix-eligible industries and names. Moving into the second quarter, our portfolio methodology led us to lighten defensive industry exposure in favor of a more diversified sector base, inclusive of industrials, consumer discretionary, and technology. In addition, portfolio cash positions by late May reached 13.5%, our highest levels since 2008. Holding cash helped Logix stay roughly flat in June while relevant benchmarks were negative primarily as a result of Fed-related speculation. With portfolio industry sales exceeding industry buys (industrials and technology industries sold, energy industry purchased), cash positions by the end of the third quarter were at 17.5% where they remain as of the writing of this letter. Historically we do not typically stay in sizeable portfolio cash positions for an extended period of time. It is worth noting however that because of effective industry rotation throughout the year, the portfolio actually outperformed the indices since late May when we started holding a notable cash position.
During the fourth quarter, the portfolio made minor changes within industries. Covidien was purchased as an additional name in the Healthcare Equipment industry grouping and Bob Evans was sold in Restaurants. Near term, we continue to be comfortable maintaining current cash positions. From a valuation perspective, the Logix universe of industries/underlying names is currently 22% below our absolute buy yield threshold which suggests a rather significant overvaluation overall. That being said, consistent with our methodology, even if we do not presently have a significant number of industries to buy, the industries we do hold are attractively valued. Based on our process, Logix industry purchases are made at trough valuations to generate significant performance upside. As evidenced by portfolio performance in 2013, with sizeable portfolio cash for a large part of the year, we believe we are attractively positioned moving into 2014 while maintaining a focus on capital preservation.
Logix performance for the year outpaced the Dow Jones U.S. Select Dividend Index even more significantly than the S&P 500 or Russell 1000 Value (Logix +35.7% versus the Dividend Index +29.1%). While Logix does invest in a portfolio of dividend yielding names, it does so with a unique, objective and consistent process utilizing (absolute and relative) yield as a valuation metric to establish appropriate, specific buy/sell thresholds. As a result, our universe and resulting portfolio construction tends to look somewhat different than those of other dividend focused managers. In addition, Logix historically has not had high correlation measures to any specific equity benchmark although given a focus on domestic, primarily large cap, deep value (as we measure it) equities, we use the S&P and Russell 1000 Value for comparison purposes. We feel the lower correlations can be an advantage in the current market landscape.
Finally, after much consideration we will begin portfolio management of a new mutual fund with a launch date slated for Spring, 2014. The mutual fund will use the identical Logix strategy that has been in place since inception. Although there will be no change to the current separate accounts management (and the advantages this structure brings in terms of transparency and tax management), minimum investment levels have previously precluded a broader audience. The mutual fund will allow for a much lower investment level, something the late founder of the Logix strategy, Abraham Feldesman, had always hoped for.
Any questions, comments or even if you just want to catch up on our current thinking, please don’t hesitate to reach out to us. With best wishes for a happy, healthy and prosperous 2014.