Cornerstone Value Fund Investment Strategy

Hennessy Cornerstone Value Fund Portfolio Managers Ryan Kelley and Josh Wein discuss the quantitatively managed concentrated portfolio of large, high dividend-yielding companies.

September 2019
  • Neil J. Hennessy
    Neil J. Hennessy
    Chief Investment Officer and Portfolio Manager
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Co-Portfolio Manager
 

Ryan Kelley:
The Cornerstone Value Fund uses a quantitative approach to investing. We're looking for large cap companies that have nice dividend yields that are trading at attractive valuations, and that, therefore, we think are undervalued at the time and could lead to increased values for our shareholders. We run a fairly concentrated portfolio of about 50 stocks, and we use the same process year in and year out to make it very transparent for our shareholders.

What we want to do is own large cap companies that are widely held, that have nice, strong dividend yields and the cash flow to support those dividend yields over time. And we think that those companies are the ones that will outperform over an entire cycle. We start with a database of 10,000 companies, and we have to whittle it down to 50. We do that in a series of steps. We're looking for greater-than-average market cap, greater-than-average shares outstanding, good cash flow, and eventually, we're left with about 200 or so companies. We rank those on dividend yield, and we buy the 50 companies that have the highest dividend yield, and that becomes the portfolio. And we rebalance once a year, generally in the winter.

L. Joshua Wein:
Given the importance of dividend yield in the Cornerstone Value Fund, it's important that each portfolio company has above-average cash flow characteristics to support the payment of the dividend. In addition, companies with strong cash flow characteristics tend to be strong, competitive, mature enterprises with strong underlying fundamentals.

If we view dividend yield as a good proxy for value, dividend paying companies tend to be reluctant to either cut or suspend their dividend. So higher yielding companies tend to be companies that represent value because their shares may be temporarily depressed.