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December 2000
Quality versus quantity. The old philosophy is beginning
to make sense in our financial markets. For the past five
years investors have been chasing the returns led by hot technology
securities. The chase is beginning to wear thin. Our Hennessy
Balanced Fund was the first to implement the "Dogs of
the Dow" investment theory in a no-load mutual fund.
The "Dogs" theory gets its strength from purchasing
out of favor stocks with a high dividend yield. The past two
years have found the "Dogs" very out of favor as
investors fled from value stocks and moved into more aggressive
sectors (i.e. biotech and technology). The recent history
of raging bull markets led by these aggressive sectors is
beginning to slow. So now where do investors turn? Back to
value investing? Somewhere else? I have always believed in
quality, and I still believe that buying and holding value
investments for the long term will forever be the prudent
way to invest.
If you look historically at the "Dogs of the Dow"
strategy, we have seen one other consecutive three-year period
where the "Dogs of the Dow" under-performed the
S&P 500 Index back to 1973. For the next three years following
the three years of underperformance the "Dogs of the
Dow" outperformed the S&P 500 Index by approximately
23%.
Wall Street is again recognizing the merit of value investing,
and many of the "Dogs" are turning around. For example,
since it's low of this year (March 29, 2000) Philip Morris
has gained over 60%, while the S&P 500 Index has returned
-4.25% for the same time period. As always, I feel that our
funds create good long-term strategies to benefit our investors
in all kinds of markets. This is why I believe our Hennessy
Balanced Fund and Hennessy Total Return Fund are going to
benefit from the recent fundamental shift in the economy for
the next three to five years and into the future.
At Hennessy Funds we believe in sensible investing. This
philosophy has helped our shareholders focus on their long-term
goals. We let history be our guide so investors can see how
our strategies have performed in down markets. Why is this
important? This allows the shareholder to determine which
strategy they can stick with over the long term. An independent
research firm, Dalbar, did an interesting study on investors'
behavior. This firm found that for the 17-year period of 1984
through 2000, the S&P 500 Index had a annualized return
of 16.29%, while the average equity mutual fund investor had
an annualized return of only 5.82%. The difference was attributed
to investors chasing performance of various mutual funds,
often missing out on the gains in the market. Investors would
have been better served sticking to one strategy than chasing
the "fund of the moment."
Our Hennessy Balanced Fund and Total Return Fund invest part
of their assets in the "Dogs of the Dow" and part
in one-year U.S. Treasury bills. Currently, the average dividend
yield for the current "Dogs of the Dow" stocks is
3.25% while Treasury bills are at approximately 6.00%. The
proximity of these two yields reiterates the low prices of
the "Dogs" we own, making this a perfect buying
opportunity for our Funds. Is the market "going to the
Dogs?" I am of the opinion that held for the long-term
- the "Dogs" will always have room to run.
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