Portfolio Update on Bank Stocks

3.16.2023

Following the regulators’ response to the Silicon Valley Bank (SVB) crisis, Portfolio Managers Dave Ellison and Ryan Kelley provided their thoughts on the Financial sector. 

Top Takeaways:

•    Liquidity issues have been building in the Financial sector for over a year now. Rising rates driven by the Federal Reserve’s desire to fight inflation have reduced prices of securities and loans across the whole industry. These price declines reduced functional liquidity as any sale of securities to fund new loan demand required taking losses, thus diminishing capital ratios. Mark-to-market accounting rules implemented in the 1990s have worked in favor of the industry as rates have generally been falling since the early 1980s. Now, as rates have risen rapidly, this accounting rule is working against bank liquidity and capital ratios. 

•    Another development over the past decade has been the rapid expansion of electronic banking, allowing customers to move money from one bank to another very rapidly. This combined with the buildup of uninsured deposits in the system was a major tipping point for SIVB and SBNY failures. The loss of confidence of these uninsured customers caused the bank run that turned fatal. Growing fear among the uninsured has spread and the Fed has responded with liquidity facilities to alleviate concerns. So far, Fed actions appear to be working.

•    We believe recent events will require regulatory action. It will most likely impact those with high uninsured balances and large investment portfolios. 

•    Our historical investment process in both Hennessy Financial funds is to focus on traditional bank models. These models have diversified loan books, core deposits predominantly insured, ample capital, and historical records producing profits through entire business cycles.
 

Current and future holdings are subject to risk.  To view the top 10 holdings of a Fund, please click the Fund name: Large Cap Financial, Small Cap Financial

 

Insights for investing in Financials

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The Funds' 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.

Mutual fund investing involves risk. Principal loss is possible. Small and medium-sized companies may have more limited liquidity and greater price volatility than larger companies. Investments in foreign securities may involve political, economic, and currency risks, greater volatility, and differences in accounting methods. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and Midstream Funds are considered non-diversified funds. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of market risk. Investments in debt securities typically decrease in value when interest rates rise. The risk is greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that the borrower will prepay some or all of the principal owed to the issuer. Funds that invest in pooled investment vehicles (including ETFs) may experience higher fees. The formula-based strategy employed by some Funds may cause those Funds to buy or sell securities at times when it may not be advantageous.

Master Limited Partnerships (MLPs) and MLP investments have unique characteristics. A Fund does not receive the same tax benefits as a direct investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low, making it difficult for a Fund to sell its units at a favorable price. MLP general partners have the power to take actions that adversely affect the interests of unit holders. Most MLPs do not pay U.S. federal income tax at the partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Fund. If the Energy Fund’s MLP investments exceed 25% of its assets, it may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code (“Code”), and the Fund would be taxed as an ordinary corporation, which could substantially reduce its net assets and its distributions to shareholders. The Midstream Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, and therefore, is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. The Midstream Fund will not benefit from current favorable federal income tax rates on long-term capital gains, and Fund income and losses will not be passed on to shareholders. The BP Midstream Fund accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV, and as a result, the Fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone Value, Total Return, Equity and Income, Balanced, Energy, Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap Financial, Technology. Fund holdings are subject to change and not recommendations to buy or sell any security.

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

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