Hennessy Focus Fund Outperforms

Mutual funds are usually on the bottom of our investment selection list, but Hennessy Focus Fund is the rare exception.

Hennessy Focus Fund (HFCSX) is a mutual fund selection we can support.  It is unusual for a fund to outperform the index over all time periods.  This fund, however, has outperformed the index by an average of 3.0% over the corresponding 1-, 3-, 5-, and 10-year investment periods.  For example, the 10-yr total annual return for HFCSX is 11.05% vs 8.13% for the S&P.  According to Morningstar, since 2005, a $10,000 investment would have grown to $28,500 vs $21,800 for the S&P.    

The fund is considered concentrated with holdings of between 20 and 30 positions.  The top five positions comprise 41% of assets. Consumer Cyclicals are 37% of assets, followed by Financials at 28% and Real Estate at 20%.

The fund is high cost with an annual expense fee of a whopping 1.4%, and a minimum investment of $2500.  Total fees over the previous 10-yr period would have been $2,600.  However, with its after-fee performance as outlined above, its high fee should not be a deterrent. Would you spend $2600 to make gross $9,300 more ($2600 fee + $6700 net outperformance)?     

One interesting aspect of studying outperforming funds is to investigate their new positions. As it is impossible to replicate their success on existing positions, the strategy is to review their recent moves with the expectations of these being within their parameters that created the outperformance.  In this light, the 1st quarter purchases in HFCSX portfolio are as follows:
•    Cell tower operator American Tower (AMT)
•    Asset management firm Brookfield Asset Management (BAM)
•    Specialty finance company Encore Capital Group (ECPG)
•    Specialty material manufacturer Hexcel Corp (HXL)
•    Industrial asset protection firm Mistras Group (MG)
•    Business equipment financing firm Marlin Business Systems (MRLN)
According to Morningstar analysis, Hennessy Focus Fund carries Below Average Risk and Above Average Return, with over 75% of assets in high growth choices across the capitalization spectrum from micro caps to mega cap.  

It should be noted a trend within the markets serviced by AMT.  The latest innovation in cell towers for populated areas calls for more towers but shorter height to gain better cell coverage. 
This will cause more sites to be utilized for the same current area coverage, increasing competition for AMT.  Based on this change, the best days for AMT may well have passed.   

Investors looking for greater exposure to these sectors should review HFCSX.  Investors looking for fresh ideas for the growth portion of their portfolios should spend some time researching management’s recent purchases


This article first appeared in the July issue of Guiding Mast Investments.  Thanks for reading, George Fisher