In a market where it's hard to find mutual funds in positive territory, $291.5 million Hennessy Cornerstone Value Fund (HICVX) has earned a place among current fund aristocracy with a 3.06% gain this year going into Thursday.
That's in contrast to the 17.03% setback by the broad market in the form of the S&P 500. Even the fund's large-cap value rivals tracked by Morningstar Direct averaged a 7.66% loss.
A key reason for Hennessy Cornerstone Value's outperformance? Fund managers Ryan Kelley, Neil Hennessy and Joshua Wein and their team use a strategy that aims "to take the emotion out of investing," Kelley said.
Mutual Funds: By The Numbers
Avoiding emotion means the managers go strictly by the numbers. They use quantitative analysis to search for stocks they want to buy.
That's in contrast to managers of many mutual funds who factor gut feelings from powwows with company leaders into their stock picks.
Kelley and company use their computers to look for big caps that have an above-average number of shares outstanding and above-average cash flow. Their comparison is to the universe of more than 2,000 stocks they consider eligible as buys.
They're also looking for companies whose trailing 12-month sales are at least 50% greater than their pool's average.
From contenders that meet those criteria, they finally buy just the 50 stocks with the highest dividend yields. "Dividends are important," Kelley said. "Stock prices may go up and down. But going back to our inception in 2008, dividends can comprise from one quarter to one half of fund total return."
And unlike mutual funds that buy and sell seemingly nonstop, this fund is picture of relative calm. To help remove emotion from their portfolio construction, managers of this fund make buys and sells just once a year. Their most recent rebalance was in March.
Recent Portfolio Additions
The fund added 11 names, including Devon Energy, an oil and gas explorer and producer, which recently happens to be a member of the IBD 50. It also added food producer General Mills and medicine maker Amgen.
The fund also got rid of 11 names. Those discards included energy stocks Petrobras and Shell, health care stock Johnson & Johnson, grocery chain Kroger and fast-food chain McDonald's.
The IBD 50 is IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
Sizing Up Macro Factors
The fund does not buy stocks based solely on macro factors. It plays individual stocks based on fundamentals, Kelley says. That's how it got to be among this year's aristocracy of leading mutual funds. But macro factors can influence a stock's fundamental prospects. The war in Ukraine, for example, has made availability of energy uncertain, pushing up prices.
The fund's energy overweight precedes the war. But the fund began its stake in Devon in March. "Devon Energy is based in Oklahoma, in the Permian Basin," Kelley said. "They're a large company. They're reaping the benefits of higher commodity prices. They have a strong dividend yield of almost 8%. They've got a history of growing their dividend." Devon's three-year dividend growth rate is above 100%.
Pfizer and Merck are drugmakers that check off all of Hennessy Cornerstone Value Fund's buy boxes. "They're large caps," Kelley said. "They're well-known. They have nice, high dividends. They're trading at pretty low valuations. Pfizer is trading at about seven times this year's earnings. Merck is at about 13 times. Both are good discounts in comparison to the S&P 500, which is about 17 times."
Pfizer's dividend yield is 3.2%. Merck's is 3.1%.
Similarly, drink and snack maker PepsiCo is a big outfit with a 2.7% dividend yield. "This is a Steady Eddie stock that keeps chugging along through different parts of the economic cycle," Kelley said. "Its dividend has been growing about 7% annually for the past five years. It exceeds organic growth targets in a tough environment. Its margins expanded slightly last quarter. That's pretty good amid inflation and supply chain disruptions."
In contrast, the fund has zero exposure to consumer discretionary stocks. And the fund is underweight in industrials versus its Russell 1000 Value benchmark. If the economy slows due to rising interest rates and inflation, consumers will likely trim purchases of discretionary goods and services. Industrials stand to be hurt by rising costs for materials they use.
And unlike many tech-crazy growth-oriented mutual funds, this fund's weighting in the technology sector was a relatively modest 14% as of March 31. Still, that was an overweight vs. its conservative Russell 1000 Value Index.
Compared To Other Top Mutual Funds
In the past three years, Hennessy Cornerstone Value Fund averaged an annual total return of 11.35% vs. 12.82% for the S&P 500 and 10.08% for its rivals among large-cap value mutual funds.
If you do not have access to Institutional shares, you can consider Investor-class shares (HFCVX).
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