10.25.2011

Markets Pull Through Corporations

10.25.2011
Terry Flanagan

Company fundamentals are strong, and mutual fund investors are encouraged to stay the course.

Volatility is rampant in the marketplace, bringing fear to investors.

Many short-term traders are utilizing investor bearishness to quickly cash in and sell, to the annoyance of long-term managers. The latter, are encouraging investors to ride out current short-term volatility in pursuit of gains to be made from strong fundamentals.

“You’ve got to stay in the markets long-term if you want to make money. It’s so easy to trade these days, and you’re not trading on fundamentals–you’re trading on emotion,” said Neil Hennessy, chairman, chief investment office, and portfolio manager of Hennessy Advisors, a U.S.-based equity asset management firm with north of $900 million assets under management.

The firm offers Hennessy Funds, a family of mutual funds, ranging from value, growth, to a couple of Japanese sub advised funds.

Within strategies, the firm’s notable mutual fund is the Hennessy 30 Fund, which seeks a long-term growth of capital by investing in 30 growth-oriented stocks selected by the purely quantitative Focus 30 formula. The formula selects domestic, mid cap companies—an area that Hennessy noted has been particularly challenging.

The S&P 400 Mid-Cap index reportedly fell 26 percent between July 7, and October 3. Growth, at large, will be “low to moderate” in the coming years, according to Hennessy.

“Investors are clinging to the wall of worry, and investors are incredibly nervous,” said Hennessy, noted that the largest capital redemptions occurred within the equity mutual fund market. “People still have it in their minds that we have a shot of going back to 2010. “

Yet, being innovative when looking for growth within portfolios does not include a traditional “flock to safety” to fixed income investing.

“Those using fixed income as a correction for safety is wrong—you’ll get crushed when interest rates go back up,” Hennessy noted.

Rather than referring to fixed income instruments, Hennessy advocated the use of income- generating stocks that provide the “bear necessities” of what investors need today.

“One of our (Focus 30) portfolio themes is that we shot up our utilities weight to 30 percent, which is unusual in growth portfolio,” Hennessy said. “But there is no other good way to increase income and get growth, than being in utilities.”

Dividend paying stocks are particularly a favorable method of benefiting from the U.S.’s strong corporate profits—which now stands at 1.9 trillion in pre tax dollars, excluding financials, versus a low figure of 1.1 trillion last year.

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