Stock-fund manager achieves market outperformance through the ‘Keep it simple’ strategy
When it comes to investing, simplicity is often overlooked in favor of complex strategies that promise big returns. However, one stock-fund manager has shown that keeping it simple can actually lead to market outperformance. The Hennessy Cornerstone Mid Cap 30 Fund, managed by Ryan Kelley, has consistently topped its fund category and index by eight percentage points annualized over the past three and five years, according to Morningstar Direct. This impressive performance is a testament to the power of a basic seven-part screen that Kelley uses to select stocks.
Kelley’s strategy focuses on midcap stocks and excludes anything with a price-to-sales ratio above 1.5. He also targets stocks with positive earnings and price momentum, eliminates non-U.S. stocks and those under $5 a share due to liquidity concerns, and ranks the remaining stocks by performance. The top 30 stocks make it into the portfolio, which is then rebalanced annually every October. This straightforward approach has been consistently successful for Kelley, who credits his strategy’s simplicity as a key factor in its effectiveness.
So, what are the core investing lessons we can learn from Kelley’s strategy? The first lesson is to go with the flow. Kelley captures momentum in three ways: by looking for positive stock-price momentum over the past three to six months, by identifying companies with improving earnings, and by targeting stocks with positive price movements over the past year. This approach allows him to ride the wave of momentum and avoid buying stocks that are still falling.
The second lesson is to let your winners run. Rather than constantly tinkering with the portfolio based on short-term trends or headlines, Kelley believes in rebalancing only once a year. This approach helps him avoid taking profits too early and allows his portfolio winners to continue performing well.
The third lesson is to favor value. Kelley’s price-to-sales cap of 1.5 means that his fund may not invest in popular stocks with high valuations. However, this focus on value provides stability and reduces volatility in the portfolio. Kelley also notes that his strategy often leads to a contrarian portfolio, as it tends to populate with stocks in sectors that are currently out of favor but have the potential for a turnaround.
The fourth lesson is to go with midcap stocks. Kelley believes that companies with market valuations between $1 billion and $10 billion are more likely to be misunderstood and therefore present opportunities for favorable returns. Midcaps have also historically outperformed large-caps and small-caps, making them an attractive choice for investors.
Finally, Kelley emphasizes the importance of staying optimistic. He attributes part of his fund’s outperformance to his own positive outlook on the market. By maintaining optimism, investors are more likely to stay invested even during market downturns, avoiding common mistakes made during times of low sentiment.
In conclusion, the success of the Hennessy Cornerstone Mid Cap 30 Fund demonstrates the power of simplicity in investing. By following a basic seven-part screen and adhering to core investing principles such as momentum, letting winners run, favoring value, targeting midcap stocks, and maintaining optimism, Ryan Kelley has consistently achieved market outperformance. This serves as a valuable lesson for all investors, showing that sometimes the simplest strategies are the most effective.
