Portfolio Update April 2019

 Cornerstone Large Growth Fund - The Fund's Portfolio Managers discuss the Fund’s quantitative investment process and how it drives the Fund’s sector and industry positioning.


April 2019
  • Neil J. Hennessy
    Neil J. Hennessy
    Chief Market Strategist and Portfolio Manager
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Portfolio Manager

What is the Hennessy Cornerstone Large Growth Fund’s investment strategy?

The Fund utilizes a quantitative approach to build a portfolio of attractively valued, highly profitable larger-cap companies. In essence, the strategy seeks high quality, high return companies that may be being overlooked by investors.

From the universe of stocks in the S&P Capital IQ Database, the Fund selects the 50 stocks with the highest one-year return on total capital that also meet the following criteria:

- Market capitalization that exceeds the Database average

- Price-to-cash flow ratio less than the Database median

- Positive total capital 

Why does the Fund use these screening criteria?

Larger market capitalization companies tend to be well-established leaders in their industries with long, successful track records and solid profitability.

A low price-to-cash flow ratio can be a good indicator of attractive stock valuation. Positive cash flow tends to be associated with companies with profitable business models.

The use of positive total capital as a screening criterion helps the Fund avoid financially weaker companies.

Why does the Fund rank by and select stocks with high one-year return on total capital?

From among the companies that have passed the screening criteria, the Fund selects the 50 with the highest one-year return on total capital. We believe return on capital is an excellent measure of a company’s profitability and is often associated with able management, high barriers to entry, and other favorable factors. As a result, we believe this measure can help uncover stocks with the potential to outperform the market.

How does the Fund seek to provide a return to investors?

We believe the Fund’s investments present the potential for capital appreciation when and if market sentiment changes and their valuations rise. Strong profitability also has the potential to lead to earnings growth, which could also drive capital appreciation.

How often does the Fund rebalance its portfolio?

The universe of stocks is re-screened and the portfolio is rebalanced annually, generally in the winter. Holdings are weighted equally by dollar amount with 2% of the Fund’s assets invested in each.

How does the Fund’s portfolio differ from its benchmark?

There are three primary industry groups where the Fund currently maintains an overweight position versus its benchmark, the Russell 1000® Index: Capital Goods, Semiconductors & Semiconductor Equipment, and Consumer Durables & Apparel.

Semiconductors & Semiconductor Equipment companies have been benefiting from strong economic growth and increasing use of semiconductors to connect everyday products, such as cars and appliances, to the Internet. As a result, many semiconductor companies have seen profitability and returns on capital rise. However, the Fund’s holdings in these industry groups are still trading on attractive valuations in terms of price-to-cash flow.

Capital Goods and Consumer Durables & Apparel stocks have lagged the general market due to concern that rising interest rates may lead to slower economic growth. We believe many now look undervalued. Despite this underperformance, the Fund’s holdings in this industry group have maintained strong levels of profitability and have continued to generate high returns on total capital and steady earnings growth.