Tag Archives: small-cap stocks

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.


Small-Cap Investors Get Sector Funds

One of the great things about ETFs is their ability to create tactical asset allocations with precision. Tactical asset allocation is an active portfolio strategy in which the investment manager accentuates certain categories of assets beyond the basic allocation in order to take advantage of exceptionally strong market sectors or pricing anomalies. After the manager makes some profits and the advantageous situation has run its course, she returns the portfolio back to its original strategic mix.

The most popular way to make a sector play with ETFs has been to purchase one of the nine funds known as the Select Sector SPDRs. These funds allow investors to hedge sector-specific risk within concentrated stock positions, add sector-specific beta to a portfolio without any stock-specific conviction, overweight or underweight specific sectors, and manage investment transitions.

For example, you could have 70% stocks and 30% bonds. Then you break down stocks into smaller allocations, such as 30% large-caps, 20% mid-caps, then 20% small-caps. If you wanted to focus on large-cap energy and financials, you could split the large-cap allocation with 10% in an energy ETF, 10% in a financial ETF and 10% in the S&P 500.

The Select Sector SPDRs break down the S&P 500 into nine industry groups. However, all these funds are filled with large-cap stocks. In fact, most sector ETFs are filled with large-cap stocks. With only 18 out of the 8,500 mutual funds and ETFs on the market categorized as small-cap sector funds, small-cap investors looking for tactical sector allocation have been at a severe disadvantage.

Invesco PowerShares remedied that last Wednesday by launching on the Nasdaq the first suite of ETFs offering sector-specific beta exposure to U.S. small-cap equities.

PowerShares S&P SmallCap Consumer Discretionary Portfolio (XLYS)
PowerShares S&P SmallCap Consumer Staples Portfolio (XLPS)
PowerShares S&P SmallCap Energy Portfolio (XLES)
PowerShares S&P SmallCap Financials Portfolio (XLFS)
PowerShares S&P SmallCap Health Care Portfolio (XLVS)
PowerShares S&P SmallCap Industrials Portfolio (XLIS)
PowerShares S&P SmallCap Information Technology Portfolio (XLKS)
PowerShares S&P SmallCap Materials Portfolio (XLBS)
PowerShares S&P SmallCap Utilities Portfolio (XLUS)

The new ETFs charge an expense ratio of 0.29% compared with the expense ratios of 0.49% for the average small-cap ETF and 0.57% for the average sector-specific ETF. The average sector-specific mutual fund charges an average of 1.75%.

With each of the nine portfolios a subset of the S&P SmallCap 600 Index, the new suite is obviously a direct copy of the Select Sector SPDRS adapted for small-caps. So much so, the new ETFs have the same ticker symbol as their large-cap counterparts with an “S” added on. And why not? The Select SPDRs are some of the most popular ETFs around with $33.75 billion in assets among the nine funds. Of course, they’ve been around for 11 years.

In fact, the idea is so obvious, it’s a wonder it hasn’t been done before. But now it seems even more important.

“Over the long term, small-cap companies have outperformed large caps with much of this outperformance occurring during post-recessionary periods,” said Ben Fulton, Invesco PowerShares managing director of global ETFs.

According to Morningstar/Ibbotson, as of March, in the 36 months following each of the last 15 recessions, small-caps outperformed large-caps by an annualized average of 5.6%. This post-recession performance has contributed to their outperformance of large-cap stocks by more than 200 basis points a year since 1926 and more than 400 basis points a year since 1975.

Over the past 10 years if you held a fund with the entire S&P 500, you’d be pretty much flat for your return. During that time, Bloomberg says each small-cap sector outperformed its large-cap counterpart. So why pick the S&P SmallCap 600 Index instead of the small-cap market benchmark the Russell 2000?

I think it’s because all the members of the Small-Cap 600 have been specifically chosen and must have posted four consecutive profitable quarters. The Russell 2000 are strictly picked based on market cap and can be unprofitable. In addition to being financially viable, to qualify as a small-cap a stock must meet the following criteria:

· They must have a market capitalization between $250 million and $1.2 billion
· They must have annual trading volume of at least 100% of its market cap
· At least 50% of its shares must be publicly available.

S&P SmallCap 600 Index is a float-adjusted, market-capitalization-weighted index reflecting