Simple Investing Strategy Beats Wall Street’s Complex Tactics
In a world where sophisticated portfolio managers often resort to complex strategies in an attempt to impress investors, the success of the Hennessy Cornerstone Mid Cap 30 Fund stands out as proof that simplicity can be the winning formula. Morningstar Direct data reveals that this fund has consistently outperformed both its fund category and index over the past three, five, and ten years.
The mastermind behind this impressive performance is Ryan Kelley, a portfolio manager at Hennessy. Kelley’s success lies in his basic seven-part screen, which focuses on midcap companies and eliminates those with a price-to-sales ratio above 1.5. He then targets stocks with strong earnings and price momentum. Non-U.S. stocks and those under $5 are also discarded due to liquidity concerns. The remaining stocks are ranked by performance, with the top 30 making it into the portfolio. Kelley sticks with this selection for a year, rebalancing in October.
Kelley’s screen is based on rigorous back-testing, which has identified the factors that consistently deliver results over a market cycle. In a recent interview, Kelley shared five core investing lessons from his strategy that can be applied by all investors.
The first lesson is to go with the flow. Kelley captures momentum by identifying stocks with positive price momentum over the past three to six months. He also looks for companies where earnings are improving or losses are narrowing.
The second lesson is the importance of letting winners run. Many investors fall into the trap of constantly adjusting their portfolios based on market trends and headlines, often at the expense of missing out on additional gains. Kelley avoids this by rebalancing only once a year.
Kelley’s third lesson is the favoring of value. The fund’s price-to-sales cap of 1.5 means it may not invest in popular stocks at the moment. However, this approach has its advantages. By focusing on stocks in sectors that are currently disliked by the market, Kelley’s portfolio takes on a contrarian edge.
The fourth lesson is to go with midcap companies. These are companies with market valuations ranging from $1 billion to $10 billion. Smaller companies like these often receive less analyst coverage and are thus more likely to be misunderstood. However, midcap stocks tend to perform well.
The final lesson is to maintain an optimistic outlook. Over the years, successful investors have often been characterized by their positive mindset. Kelley believes that his fund’s outperformance is partly due to his own optimistic perspective. By remaining optimistic, investors are more likely to stay invested, even during market downturns when sentiment is negative.
The Hennessy Cornerstone Mid Cap 30 Fund serves as a testament to the power of simplicity in investing. By following a straightforward strategy and sticking to core principles, this fund consistently outperforms its peers. As investors navigate the complexities of the market, it may be worth considering whether a back-to-basics approach could yield superior results.
Analyst comment
Positive news.
As an analyst, the market can expect the Hennessy Cornerstone Mid Cap 30 Fund to continue its outperformance relative to its peers. Its simple seven-part screen and adherence to core investing principles have consistently delivered superior results, making it an attractive option for investors seeking a back-to-basics approach in navigating the complexities of the market.
