A Good Mutual Fund for Mid-Cap Stocks

Fund Watch

A Good Mutual Fund for Mid-Cap Stocks

With Hennessy Cornerstone Mid Cap 30's review system, stocks come and go.

You won’t see chicken processor Pilgrim’s Pride and Skechers, the maker of trendy sneakers, at the top of many portfolios. But they’re among the biggest holdings of Hennessy Cornerstone Mid Cap 30, a fund that follows strict rules in search of midsize companies trading at reasonable prices. “Mid caps are more stable than small businesses but also have the potential to grow into large-cap companies,” says Brian Peery, who runs the fund with Neil Hennessy. “They’re the sweet spot of the market all around.”

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The managers begin by narrowing the size of their universe, considering only stocks with market values of $1 billion to $10 billion. Then they apply a value screen: Only stocks selling for less than 1.5 times sales per share make the cut. The next filter eliminates firms that haven’t had a year-over-year increase in earnings. Finally, the managers want stocks with price momentum. After identifying stocks that have advanced over the past three, six and 12 months, they rank them by performance over the past year. The 30 stocks with the biggest gains make it into the portfolio, with each stock getting an equal weighting.

The process is repeated once a year, usually in the fall, and it’s common for almost every stock—and, occasionally, every stock—to be replaced. During the fund’s 2012–13 fiscal year, for example, it was loaded with housing stocks. At last report, none of those stocks is in the portfolio.

* Annualized for three and five years. @ Rankings exclude share classes of this fund with different fee structures or higher minimum initial investments. t For all share classes combined. MSCI EAFE index consists of developed foreigh stock markets. Sources: Morningstar Inc., Vanguard