This weekend’s profile in Barron’s features the Hennessy Cornerstone Mid Cap 30 Fund (HFMDX; Investor Class shares). This $930 million no-load fund has a 1.32% gross expense ratio and 5% turnover. According to the article

Over 10 years, mid-caps delivered 6.7% annually, versus 6.4% for large companies, and 4.7% for small. The Cornerstone Mid Cap fund returned 6.8%, beating 86% of its peers.

Alpholio™ agrees that mid-cap equities are a compelling asset class.

The primary prospectus benchmark for the fund is the Russell Mid Cap Index. One of the accessible implementations of this index is the iShares Russell Mid-Cap ETF (IWR). Alpholio™’s calculations show that since late 2004 the fund returned more than the ETF in approximately 61% of all rolling 36-month periods with a median cumulative (non-annualized) outperformance of 1.3%. Similarly, the fund outperformed the ETF in 59% of all rolling 24-month periods and 62% of 12-month periods.

The secondary prospectus benchmark for the fund is the S&P 500® Index. One of the low-cost implementations of this index is the iShares Core S&P 500 ETF (IVV). Over the same evaluation interval, the fund returned more than the ETF is about 78% of all rolling 36-month periods (with a median cumulative outperformance of 5%), 72% of 24-month periods and 60% of 12-month periods.

While comparisons of rolling returns provide a valuable insight, they do not take the fund’s risk into account. To do so, let’s employ Alpholio™’s patented methodology. One variant of this approach constructs a custom and dynamic reference portfolio of ETFs for each analyzed fund. This portfolio has a fixed ETF membership but variable weights, which enables it to more accurately track the fund’s composition over time. Here is a resulting chart of the cumulative RealAlpha™ for Hennessy Cornerstone Mid Cap 30:

Cumulative RealAlpha™ for Hennessy Cornerstone Mid Cap 30 Fund (HFMDX)

Over the last 11 years, the fund produced around 3.1% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit out FAQ). However, the fund achieved this commendable result at the expense of elevated volatility: standard deviation of 18.3% compared to 16.9% of the reference ETF portfolio. This was underscored by considerable declines of the cumulative RealAlpha™ in September 2008 and from the second half of 2015 through January 2016. The fund’s RealBeta™, measured against a broad-market equity ETF, was 1.04.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Hennessy Cornerstone Mid Cap 30 Fund (HFMDX)

The fund had top equivalent positions in the iShares S&P Mid-Cap 400 Growth ETF (IJK; average weight of 37.3%), iShares Morningstar Small-Cap ETF (JKJ; 17.7%), PowerShares Dynamic Market Portfolio (PWC; 11.3%), iShares Transportation Average ETF (IYT; 10%), iShares Morningstar Mid-Cap Growth ETF (JKH; 8.3%), and Vanguard Energy ETF (VDE; 8%). The Other component in the chart collectively represents additional two ETFs with smaller average weights.

The Hennessy Cornerstone Mid Cap 30 Fund added a substantial amount of value on a truly risk-adjusted basis. However, the cost of this performance was a significant volatility that stemmed from a concentrated nature of the fund’s holdings (30 equally-weighted positions, constructed annually). Although turnover was very low, the fund produced relatively big distributions which made it largely unsuitable for taxable accounts.

To learn more about the Hennessy Cornerstone Mid Cap 30 and other mutual funds, please register on our website.


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