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Hennessy Cornerstone Growth Fund

The numbers have been working for this quant fund

Letting programs select the stocks that wind up in a fundís portfolio can be rewarding. With no emotions involved, and the right set of screens, program driven quant funds can pay off. Hereís one that combines growth and value companies and is doing just that.

The Hennessy Cornerstone Growth Fund, (HFCGX), has been around since 1997, has never had a down performance year, and this year, when the average small-cap growth stock was down over 9 percent at the end of May, it was up almost 11 percent.

Neil Hennessy, the fundís portfolio manager since July 2000, says the fundís success has a lot to due with discipline. " We have a formula, thatís in the prospectus --and weíre bound by the prospectus-- thatís highly disciplined and leaves absolutely no room for emotions. Which is really no different than how things work in the real world. For instance, if youíre in a conversation with someone and your emotions get into it, most likely youíre going to loose."

The Hennessy Cornerstone Growth Fund, ( 1800-966-4354), keeps 50 stocks in its portfolio, rebalances its portfolio once a year and is best suited for those who like the idea of letting a computer driven program pick their fundís holdings each year.

Hereís more about the Hennessy Cornerstone Growth Fund from itís portfolio manager:

Q: Tell me about the kinds of screens you use when selecting stocks.

Hennessy: Our first screen is for size so we screen about 9700 different companies looking for market caps over $172 million. Thatís so we donít get caught with micro-cap companies. The second screen is, we want a price to sales ratio of 1.5 or less---meaning that weíre not going to pay more than $1.50 for a $1 in sales. And thatís the value side.

The next screen is, to make sure that a companyís earnings are higher than the year before so we know the money is dropping to the bottom line. Then the last screen is, we buy the 50 companies with the best relative strength over the last three-, six- and 12-month periods. So essentially, you end up with a value oriented strategy with momentum.

Q: The portfolio typically changes every year. Do you trade it all year long?

Hennessy: We refresh once a year and the window for that rebalancing is between October and February. So, the companies that we invest in, come to us meaning that they filter down through our screening process.

Thatís why in 2000 and 2001, we didnít have any technology. This year, six percent of the portfolio is in technology. What that tells us is that itís time to start to nibble on some of the cheap (tech) companies as they come into our radar screen.

Last year, it was home builders. A handful of them, like NVR Corp. and Ryland, have stayed in the portfolio.

Q: Whatís the average size of the companies held and the sectors youíre currently invested in?

Hennessy: The average market cap is about $950 million. Even if youíre under about $1.2 or $1.3 billion youíre still considered small-cap.

Regarding the sectors, thatís a tough question depending upon how you break things down. I will tell you that itís pretty much spread out and that we donít have any thing in utilities or energy.

Q: Doesnít the fundís high turnover rate pose a problem for investors?

Hennessy: Normally the fundís turnover rate is about 100 percent and people say to me, well thatís not really very tax-efficient. But my main concern is making my clients money. If I make them money, they are going to have to pay taxes. Thatís the way it is in the real world: You make money , you pay taxes.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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