Hennessy Cornerstone Growth Fund

Letting programs select the stocks that wind up in a fund’s portfolio

can be rewarding. With no emotions involved, and the right set of screens,

program driven quant funds can pay off. Here’s 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 fund’s portfolio manager since July 2000, says the fund’s

success has a lot to due with discipline. " We have a formula, that’s in the

prospectus --and we’re bound by the prospectus-- that’s 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 you’re in a

conversation with someone and your emotions get into it, most likely you’re

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

fund’s holdings each year.

Here’s more about the Hennessy Cornerstone Growth Fund from it’s 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. That’s so we don’t get

caught with micro-cap companies. The second screen is, we want a price to

sales ratio of 1.5 or less---meaning that we’re not going to pay more than

$1.50 for a $1 in sales. And that’s the value side.

The next screen is, to make sure that a company’s 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.

That’s why in 2000 and 2001, we didn’t have any technology. This year, six

percent of the portfolio is in technology. What that tells us is that it’s

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: What’s the average size of the companies held and the sectors you’re

currently invested in?

Hennessy: The average market cap is about $950 million. Even if you’re under

about $1.2 or $1.3 billion you’re still considered small-cap.

Regarding the sectors, that’s a tough question depending upon how you break

things down. I will tell you that it’s pretty much spread out and that we

don’t have any thing in utilities or energy.

Q: Doesn’t the fund’s high turnover rate pose a problem for investors?

Hennessy: Normally the fund’s turnover rate is about 100 percent and people

say to me, well that’s 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. That’s 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.