NEW YORK — Running its quantitative screens for its annual rebalancing, the Hennessy Focus 30 Fund turned up two sectors that at first puzzled Neil Hennessy, chairman and chief investment officer of Hennessy Funds: energy and utilities.

But when Hennessy reflected on these two overweight signals, they made sense, Hennessy told a press briefing in midtown here Tuesday.

“It’s all about necessities. Consumers are still doing more with less, and investors are clinging to the wall of worry,” Hennessy said. “Three major necessities are heat, water and electricity—which equal recurring and predicable returns that, on average, yield 4.21%.”

Thus, the recent rebalancing has boosted the fund’s exposure to utilities from 0% to 30% and to energy, from 3% to 13%. In addition, the fund’s consumer discretionary holdings, most of which are in discounted stores or consumer staples, are now fully 53%. And 87% of the fund’s holdings are in dividend-paying stocks.

As long as consumer and business confidence remains dilapidated, economic growth in the U.S. will be tepid, Hennessy predicted.

Like last year, when the fund took a similar defensive position, Hennessy said, “it’s politics as usual. We are no closer to getting clarity from Washington than we were a year ago on taxes, healthcare or regulation. Without these, businesses won’t hire and will continue to sit on $2 trillion in cash. Unemployment will remain high. Growth will remain low.”

Although Hennessy predicts U.S. stocks will return 4% in 2012 and the markets will remain in slow-growth mode, at some point in the future, the markets will move away from trading on emotion and fear, to once again trade on the solid fundamentals underpinning the American economy, Hennessy said.

There have been 11 instances of 500-point or greater intraday swings in the Dow so far this year, 80% of which occurred in the last 90 days, Hennessy noted. Prior to Aug. 4, when Standard & Poor’s downgraded the U.S. sovereign debt, there were no intraday moves of more than 300 points, he said.

“For those with the guts to jump in," for those able to tune out the market volatility, debt problems in the EU, Washington’s impasse and corporations sitting on the sidelines of capital investment and hiring, "it is a huge buying opportunity—long term,” Hennessy said. “Corporate profits are at an all-time high. Q211 saw $1.9 trillion in pre-tax profits. Corporate America is strong. The market at some point in time will once again trade on fundamentals.”

-- This article first appeared on Money Management Executive.



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