Hennessy Funds Outperform With Active Management

More than 70% of actively managed U.S. stock funds lagged their benchmarks over the five years ended June 30, according to the S&P Dow Jones Indices Versus Active (SPIVA) U.S. scorecard.

Hennessy Funds were an exception. Over those five years, nearly 70% of Hennessy’s funds beat their benchmark on an annualized basis.

The SPIVA U.S. scorecard measures performance of actively managed funds against their relevant S&P index in the stock market.

“The past five years (through June 30) have been marked by the rare combination of a remarkable rebound in domestic equity markets and a low-volatility equity environment,” Aye Soe, senior director, Index Research & Design, S&P Dow Jones Indices, wrote in the SPIVA report. Soe added, “This combination has proven difficult for domestic equity managers… across all capitalization and style categories.”

Among U.S. equity funds, 60% of large-cap, 58% of midcap and 73% of small-cap managers underperformed their benchmarks, according to SPIVA.

Managers of international equity fared worse. About 70% of global equity funds, 75% of foreign equity funds, 81% of foreign small-cap funds and 65% of emerging market funds lagged their benchmarks.

Yet of Hennessy Advisors’ 16 funds, which run $5.7 billion, six outperformed their indices for the 12 months ended June 30.

On a five-year annualized basis, 11 funds beat their benchmarks net of fees. Six of the 11 turned over their portfolios just once a year.

“It’s not timing the market, it’s your time in the market,” said Neil Hennessy, the firm’s president, chairman and chief investment officer. “We buy the stocks with a highly disciplined formula, and we hold for a year with no emotions. Then we do it again.”

The two best performers are Hennessy Japan Fund and Hennessy Japan Small Cap Fund.

Over the 12 months that ended June 30, the small-cap fund gained 28.68% vs. the Russell/Nomura Small Cap Index’s 17.21%, says Morningstar. Over the past five years, the fund’s annualized return of 15.13% beat the index’s 9.87% .

The Japan Fund’s 17.54% gain over the past year beat the Russell/Nomura Total Market Index’s 10.86% gain. The fund’s 14.40% five-year average annual return topped the index’s 7.48%.

Among U.S. equity funds, Hennessy Cornerstone Mid Cap 30 gained the most over the 12-month period. Its 31.95% outperformed the Russell MidCap Index’s 26.85%. On a five-year annualized basis, the fund returned 22.32%, beating the index’s 22.07%.

Hennessy Cornerstone Large Growth rose 29.35% over the 12 months ended June 30, exceeding the Russell 1000 Index’s 25.35%. Its five-year average annual return of 19.48% beat the index’s 19.25%.
Hennessy’s best funds over the five years held bonds and stocks. Hennessy Total Return Fund, at 75% equity and 25% bonds, beat the 75/25 Blended DJIA/Treasury Index 15.19% vs. 13.41% on an annualized basis.

Hennessy Core Bond’s 5.42% return outpaced the Barclays U.S. Government/Credit Intermediate Index’s 4.09%.

As for volatility, over the past five years each outperformer beat its bogey four years; the Mid Cap 30 outperformed just three years.

For the full story go to Investor’s Business Daily.

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Hennessy: “I Hope We Go Over Fiscal Cliff”

Neil Hennessy doesn’t just think the U.S. will go over the fiscal cliff; he wants it to happen.

“I hope we go over,” said the Hennessy Funds’ all-around top dog about the fiscal cliff, the name given to the end-of-the year budget changes. On Jan. 1, spending reductions across the entire federal budget will kick in automatically the same day the Bush tax cuts expire. “I guarantee that within six months, Washington will get the tax situation right and the country should be on surer footing. But, within the next 30 days it’s unlikely they would get it right.”

Hennessy presented his 5th annual market outlook, as well as portfolio changes and the renaming of his flagship mutual fund at a New York press conference last Tuesday. Investors are incredibly nervous, said the chairman and chief investment officer of the Novato, Calif., fund house, because there is a crisis of clarity. He pointed to the August consumer confidence level, which hit its lowest point since March 2009, the month the market hit bottom during the fiscal crisis. While the presidential election cleared up the uncertainty over healthcare reform, the fiscal cliff will give us clarity on taxes and regulation, said Hennessy.

From 2008 through 2011, investors have pulled $404 billion out of U.S. equity mutual funds, while putting $775 billion into fixed-income funds. The trend continued into 2012 with equity funds seeing outflows of $116 billion vs. bond fund inflows of $278 billion.

However, Hennessy says equities are the only logical place to be in light of corporate profits near their all-time high. Investors have few other places to go, he said dismissing the real estate sector, the European Union and emerging markets. Meanwhile, bonds are not much of an option with the yield on the 10-year U.S. Treasury bond falling to 1.68% from 2.13% a year ago. Meanwhile, the yield on the “Dogs of the Dow,” the 10 highest yielding stocks in the Dow Jones Industrial Average is 4.13%, or 146% higher than the 10-year bond. The current yield on the full Dow Industrials is 2.67%.

In October, Hennessy Funds acquired all ten FBR Funds and merged them into existing funds. This brings the total assets under management at Hennessy Funds to $3.1 billion and total shareholders to about 180,000. The Hennessy Focus 30 Fund after merging with the FBR Mid Cap Fund was renamed the Hennessy Cornerstone Mid Cap 30.

Based on a rebound in the housing market and consumers spending more on their homes, the fund’s year-end portfolio rebalancing pushed consumer discretionary up to 40% of the assets from 30% a year ago. Industrials jumped from 13% to 30%, while Utilities fell from 30% of assets to 0%. The fund also had no assets in information technology or consumer staples. The fund’s top consumer picks are Pier 1 (PIR), Whirlpool (WHR) and Mohawk Industries (MHK). Industrials. In the housing sector he likes Standard Pacific (SPF), KB Homes (KBH), and Meritage Homes(MTH), as well as building products companies: USG (USG), Masco (MAS) and A.O. Smith (AOS).

Hennessy Continues Cautious View on Economy

Even as the stock market surged on Thursday, Neil Hennessy, chairman and chief investment officer of the Hennessy Funds, continues to hold a cautious outlook for stocks and the economy.

The Dow Jones Industrial Average jumped 340 points Thursday, or 2.9%, to 12209, while the S&P 500 soared 43 points, or 3.4%, to 1285 after bondholders of European debt were browbeaten by politicians into accepting at 50% write-down to their Greek debt.

While the bondholders’ new Greek haircut removes one black cloud hanging over the markets, Hennessy believes there’s enough negativity in the U.S. economy to remain wary of the near future.

On Tuesday, Hennessy announced the rebalancing of his portfolio for his Focus 30 Fund. He screens for five variables, market cap between $1 billion and $10 billion, no foreign stocks, price-to-sales ratio below 1.5, growth in annual earnings, and stock price appreciation over last six months. This strategy has given the fund a 21.7% annualized return over the past three years, beating the S&P 500’s 17.4%. But over the past year the fund underperformed the index by 50 basis points to 10.37%, as of Oct. 27.

A closer look at the portfolio changes gives an idea of what Hennessy thinks will be the growth sectors next year. The biggest changes were consumer discretionary fell from 50% of the portfolio to 30%, while utilities jumped from 0% to 30%, and consumer staples from 0% to 10%. Meanwhile, financials, health care, and materials all fell to zero. With consumer discretionary down and utilities and consumer staples up this long-term growth mutual fund is so defensive it looks like they’ve battened down the hatches for a big storm.

Much like when I spoke with Hennessy a year ago, he continues to feel one of the biggest problems for business is the lack of leadership in Washington.

One of the biggest issues is that the Dodd-Frank regulations remain mostly unwritten. Without a clear understanding of what the government plans to do about new regulations, taxes, or the new healthcare plan, Hennessy says few companies are willing to hire. And with the presidential campaign picking up steam, he has little hope of clarity before the election.

With unemployment high, economic growth remains low, he added. Highlighting his sentiment is U.S. consumer confidence fell in August to its lowest level since March 2009. Also in August, investors pulled the most money out of mutual funds since October 2008, right after the Lehman Brothers bankruptcy.

With the yield on the Dow Jones Industrial Average at 2.9%, Hennessy says, just like last year, companies will focus on dividends, either initiating or increasing existing ones, as a way to drive their stock prices higher. Meanwhile, the Dogs of the Dow, the ten highest-yielding stocks in the Dow industrials, currently yield 4.1%, or 30% higher than the 3.2% yield on the 30-year U.S. Treasury Bond. The Hennessy Total Return Fund is a mutual fund that tracks the Dogs of the Dow strategy.

Hennessy says stocks are cheap because market fundamentals, such as price-to-sales, price-to-book, price-to-cash-flow and price-to-earnings, are significantly below their 5-year and 10-year averages. The market’s P/E ratio is currently a multiple of 13, compared to its 5-year average of 16.

If you want to focus on the two main sectors of the Focus 30 Fund check out the Utilities Select Sector SPDR ETF (XLU) or the Consumer Staple Select Sector SPDR ETF (XLP).

Five good ETFs for dividend investing:
SPDR S&P Dividend ETF (SDY)
WisdomTree Emerging Markets Equity Income Fund (DEM)
iShares S&P U.S. Preferred Stock Index Fund (PFF)
First Trust DJ Global Select Dividend Index Fund (FGD)
Guggenheim Multi-Asset Income ETF (CVY)

For my full analysis of these five ETFs go to Kiplinger.com.

Hennessy Affirms Negative Outlook

I recently discussed the state of the economy and stock market with Neil Hennessy, head of the Hennessy Funds. Hennessy doesn’t run any ETFs, but follows a dividend strategy in most of his mutual funds.

Hennessy agrees with Ed Keon, the portfolio manager at Quantitative Management Associates, that there continues to be a high level of caution and pessimism in the country. (Cautious Forecast for Next 6 Months)

“American investors have absolutely no faith that their government can correct the problems,” says Hennessy, adding that companies are not hiring because they don’t know what the health care and regulation costs will be. “If I don’t know the cost of an employee, why would I hire one?”

He says most people have moved pass the financial crisis to focus on three contentious issues that currently dominate the media: the new health care system, immigration and the poor job the government did about cleaning up the oil spill in the Gulf of Mexico.

“There’s no leadership coming out of Washington,” says Hennessy, and “no confidence in leaders, leads to no confidence in the stock market.”

However he predicts that companies will focus on dividends to make the stock market go higher. Currently companies are hoarding historical levels of cash. Hennessy says the 30 companies in the Dow Jones Industrial Average have $500 billion in cash and short-term investments on which they are currently earning barely anything. He believes “more and more companies will raised dividends” to attract investors by offering higher yields than bonds. Holding to the dividend philosophy, he says put your money into something that will earn something in a down market.

The Hennessy Total Return Fund seeks both capital appreciation and income by following the well-known dividend investing style of the Dogs of the Dow. This strategy holds the ten highest-yielding stocks in the Dow industrials. A stock with a high yield is typically one whose price has fallen, hence these are the “dogs.” The fund puts 75% of its money into the Dog stocks and the remaining 25% in short-term Treasury notes.

Year-to-date, the Total Return Fund is beating the S&P 500 return by 3.3% to 0.96%. For the past twelve months, the fund topped the index by 0.23%. However, for calendar year 2009, the index outdid the fund 26.5% to 16.9%. The fund currently yields 1.7%, but most of that is eaten up by the 1.27% expense ratio.

A good dividend ETF is the iShares S&P US Preferred Stock Index (PFF). When Hennessy talks about increasing dividends, he means the dividends paid by common stock, which can be increased whenever the companies chooses to do so. Preferred shares are more like bonds in that their payments rarely change, so this fund won’t get the upside from increasing dividends. Since preferred payouts won’t increase if the companies boost their dividends, preferred shares typically pay a higher yield. The iShares S&P US Preferred Stock Index is up 7.3% year-to-date, with a 6.9% yield and expense ratio of 0.48%