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Seeking Lower Volatility Through a Better Upside/Downside Ratio
Hennessy Equity and Income Fund
Interview with: Mark DeVaul, Gary Cloud

Author: Ticker Magazine
Last Update: Jul 13, 1:18 PM ET
Combining stocks and bonds offers investors the potential to capture most of the upside while limiting the downside of volatile stock markets. Mark DeVaul and Gary Cloud, portfolio managers of the Hennessy Equity and Income Fund, focus on investing in quality dividend-paying stocks and investment-grade corporate bonds with the objective to generate alpha along with the benefit of downside protection.

“The fund’s goal is to capture most of the market upside as measured by the S&P 500 Index and limit the downside. Over the last 10 years, the fund has captured 84% of the market return with 41% less volatility.”
Q: What is your definition of risk? How do you control it?

A: For us, risk is permanent loss of capital, so we focus on left-tail risk for every name. We seek companies with sustainable competitive advantages, then to attempt to limit the downside, we look further to identify those with a strong balance sheet. For each holding, there are also additional steps taken which have the potential to limit potential downside even more.

Our risk-management process is all bottom-up and uses conservative assumptions when calculating the intrinsic value of a security. Moreover, our balance sheet optimization model recognizes each position will be a meaningful one.

On the fixed-income side of the portfolio, we are aware that we live in a world of asymmetrical return – which means that in the best-case scenario, we get paid the coupon and our principal returned, but if things go wrong, we could lose a portion of our invested principal.

Controlling risk, in our opinion, is about continuously monitoring the creditworthiness of the bonds we own, and a large part of that requires simply watching what’s going on with the underlying equity. It would not be positive for credit performance if a stock price dropped 20% or 30%, so we always pay attention to the companies and industries we own on both the debt and equity sides of the ledger

Finally, our incremental approach attempts to limit losses and risks. Because market conditions or circumstances around a particular issue can change overnight, we limit exposures and spread holdings across several names.

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