An AI-Driven Portfolio Aligned with Investors' Values

The Portfolio Managers provide their view on the equity market, their investment process, a few select holdings, and the key benefits of investing in the Hennessy Stance  ESG ETF.

November 2023
  • Kyle Balkissoon
    Kyle Balkissoon
    Portfolio Manager
  • Bill Davis
    Bill Davis
    Portfolio Manager

Would you please provide your view of the overall equity market?

In 2023, market performance has been dominated by a few large-cap stocks dubbed the “Magnificent Seven.” These companies include Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla which make up approximately 30% of the S&P 500’s market cap.
In the fourth quarter, the proportion of stocks that outperformed the S&P 500 Index in October was higher than the previous three quarters this year, which may be a sign that performance participation is beginning to broaden out. As investors absorb the results from the earnings season, we believe more companies will benefit.

As it pertains to the Hennessy Stance ESG ETF, half of the “Magnificent Seven” stocks have been excluded from the portfolio as they do not fit our ESG criteria and our artificial intelligence (AI) model overlay. Specifically, Amazon, Meta and NVIDIA did not score in the top half of their industry peer group in multiple ESG factors and/or did not have higher risk-adjusted return potential compared to peers. 

Of the Magnificent Seven, Microsoft is currently a top portfolio holding. The company has forecasted overall strong sales growth including cloud and software. The portfolio also owns Apple, Alphabet, and Tesla among its 35 holdings as of 9/30/23.

Why is Health Care among the portfolio’s largest sector weightings?

First and foremost, these companies must rank in the top half of peers in our proprietary ESG analysis and have the potential to outperform on a risk-adjusted return standpoint. As a final component of our process, we undergo portfolio optimization in an attempt to minimize tail risk and maximize diversification. 

Hence, several Health Care companies generally are included in the portfolio as these areas tend to be less correlated with each other and generally offer broad diversification. The ETF holds 10 Health Care holdings comprising nearly 30% of the portfolio. These holdings are in sub-industries including device and pharmaceutical manufacturers, health insurance companies and biotechnology businesses.

Would you please discuss a Health Care holding that fits your investment criteria?

We believe UnitedHealth Services, an American multinational managed healthcare and insurance company, is a good example. The company has been focused on creating a leaner cost structure and earnings growth is expected to be largely driven by demand. UnitedHealth has been experiencing margin expansion as it makes investments in automation and AI. In addition, the macroenvironment appears positive with a rising demand for health care as baby boomers age.

What are the key benefits for investing in the Hennessy Stance ESG ETF?

We believe the ETF offers investors the following benefits:

•    Best-in-class system: Our proprietary machine-learning model compares fundamental financial data with historical market data.
•    9+ year history: At Stance Capital, we have been actively building portfolios and employing this comprehensive model since 2014.
•    Focus on outperformance with lower risk: We focus on companies we believe are most likely to outperform their peers while providing less risk.
•    Aligned with investor values: The Fund was created for investors who want to have the potential opportunity to outperform the overall S&P 500 Index with less risk while still aligning their capital with their values.

Importantly, with the Hennessy Stance ESG ETF, we are looking for a dispassionate and structured way to invest in ESG-oriented companies that is consistently applied over time.

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Hennessy Funds
7250 Redwood Boulevard, Suite 200
 Novato, CA 94945
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The Fund's investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 1-800-966-4354.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here.

Neither forward earnings nor earnings growth is a measure of a fund’s future performance.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact an ETF's ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns.

Investing involves risk, including possible loss of principal. Gains or losses on a single stock may have a greater impact on the Fund. For these and other reasons, there is no guarantee the Fund will achieve its stated objective. The Fund seeks to pursue its investment objective by using proprietary models that incorporate quantitative analysis. There is no guarantee that the Portfolio Managers’ use of these models will result in effective investment decisions for the Fund. From time to time, the Fund may concentrate its investments in one or more industry sectors. The Fund is currently substantially invested in the Health Care, Financials and Consumer Discretionary sectors and its performance is therefore tied closely to, and affected by, developments in these industries. The Fund invests in small-sized and medium-sized companies, which may have more limited liquidity and greater price volatility than larger, more established companies. Smaller companies may have limited product lines, markets, and financial resources, and their management may be dependent on fewer key individuals.

Sustainability investing risk is the risk that applying sustainable investment analysis to the Portfolio Managers’ investment decisions regarding the Fund’s portfolio may forgo certain investment opportunities otherwise available to the Fund. The Fund intends to invest in companies with measurably high sustainability ratings relative to their sector peers, and screen out particular companies that do not meet its sustainability criteria. The Fund believes that these sustainability factors are material to its assessment of the risk-return profiles of companies in which it invests. The relevance and weighting of sustainability criteria may vary significantly among issuers and third-party data providers. Sustainability is a subjective assessment and it is not uniformly defined. Sustainability data may be incomplete, delayed, inaccurate, or unavailable, which could lead to an incorrect assessment of a company’s sustainability characteristics. The Fund’s returns may be lower than other funds that do not seek to invest in companies based on sustainability ratings or screen out certain companies or industries. The Fund seeks to identify companies that it believes may have higher sustainability ratings, but investors may differ in their views of sustainability characteristics. As a result, the Fund may invest in companies that do not reflect the beliefs and values of any particular investor. Regulatory changes regarding the definition or use of sustainability criteria could have a material adverse effect on the Fund’s ability to invest in accordance with its sustainability strategy.

For additional risks of investing in the fund, please see the prospectus.

Diversification does not eliminate the risk of experiencing investment loss.

Distribution Rate reflects the investment income per share during the last 12 months divided by the share price at the end of the period, expressed as an annual percentage rate. It is calculated by annualizing the Fund’s most recent distribution. The annualized dividend yield may not reflect the actual yield an investor would receive. 30-Day SEC Yield is a standardized yield computed by dividing the net investment income per share earned during the past 30-day period by the share price at the end of the period, expressed as an annual percentage rate. The 30-Day SEC Yield should be regarded as an estimate of the Fund’s rate of recent investment income, and it may not equal the Fund’s actual distribution rate. Past yields are no guarantee of future yields.

Glossary of Terms contains definitions and additional information.

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

The Hennessy Funds are offered only to United States residents, and information on this web site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of any Hennessy Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

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