An Old Dog Gets New Life
Hennessy Total Return Fund
Author: Dave Jennings
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|Suddenly dividends are in vogue again, and Neil Hennessy's formulaic investment approach fits right in with the renewed focus on dividend paying stocks. His Total Return Fund is based on a proven theory known as 'Dogs of the Dow' that invests in the 10 highest yielding Dow 30 components. Year to-date, the fund is tracking the staid old index – without the associated transaction costs.
||Hennessy Total Return Fund|
It was one of the highest yielding. I remember having to buy Woolworth at 25 and 26, knowing full well that they were going to cut their dividend because they were losing money. It was just a terrible situation. Everybody on the Street knew it. But I could not go away from the formula. So I stuck and had to continue to buy it. Then I sold it out at $15 or $16, although it killed me. That's not a real smart move for a money manager.
Q: I understand you rebalance this fund once a year.
Correct. What is interesting about that lesson is we were buying a whole lot more of Union Carbide at $16 and $17 a share than we were of Woolworth. When we sold Union Carbide out, we sold at $35 and $36. Although we lost money on Woolworth, we made a lot of money on Union Carbide and that averaged it all out. And that's why you stick with the system. Nobody liked Union Carbide at the time.
Q: Carbide was eventually acquired by Dow Chemical.
Nobody wanted to buy Philip Morris when it was at $19 or $20 a share. That's why our system works. Every one of our funds, as you know, including total return and balanced, are highly disciplined and non-emotional. What you see is what you get. There is no quarterly window dressing that goes on. There is no style drift. It's plain and simple.
Q: The other two funds you manage also invest according to a systemized theme that only rebalances annually.
That's been our success. While everybody got caught up in the dot-com mania, we could not. We were losing assets to tech and Internet funds and everybody saIdent, 'You don't know what you're doing.' Then 2000 came and it's a whole different ball game. Then you compared our returns. The idea to investing – and our company philosophy – is it's not what you make on the upside; it's what you don't lose on the downside. We've been able to do that for our shareholders. Some statistics I've read state that some people are back to the same amount of money that they had in 1996 and 1997. We just continually grow little by little.
Q: As money comes into the fund throughout the year, how do you allocate it into the stocks?
We have anywhere from 15 to 25 different portfolios. We'll have a portfolio, say, on January 1, and then we have another portfolio on January 15. All these individual portfolios are held for one year and then adjusted. You really have in our funds a rolling Dogs of the Dow and a rolling T-Bill. When new money comes in, we allocate it to whatever portfolio is coming due. We're always buying the 10 highest yielding stocks for that individual portfolio.
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