Q:  What is the history and objective of the fund? A : Hennessy Funds offers investors 16 funds to choose from, with strategies that can play a role in nearly every portfolio allocation. Our fund line-up includes traditional equity, specialty category and sector funds, as well as more conservative balanced and fixed income products. Several of the Funds we offer are quantitatively managed. The Hennessy Cornerstone Mid Cap 30 Fund is one of our quantitatively managed portfolios. Hennessy Cornerstone Mid Cap 30 Fund uses historically back-tested strategies that outperform its relative index but with a lower risk profile. The objective of the fund is to generate long-term growth by investing in 30 domestic mid-cap companies that are growing at a higher rate than peers and trading at a discount. Q:  What core beliefs guide your investment philosophy? A : We are looking for companies that are enjoying certain competitive advantage in the marketplace either because of superior products or services or better execution of business processes. From time-to-time these mid-sized companies fall out of favor and are trading at a discount to their long term growth potential. We search for these companies using our screening methodology to identify market leaders in earnings and sales growth. We are strict in our investment discipline and we are not averse in selling stocks of these companies when they either trade at an excessive market valuation or lose business momentum, which would only happen when we rebalance the fund. Q:  What is your investment process? A : We start with a group of companies with market capitalization between $1 billion and $10 billion, excluding foreign companies. . Second we look for companies that have a price-to-sales ratio below 1.5. This is our value criterion. This parameter uses sales as its guide because sales figures are more difficult for companies to manipulate than earnings and we believe that sales numbers frequently provide a clearer picture of a company's potential value. Third, we look for companies that are able to grow earnings at a faster pace than sales, meaning higher sales contribute more to profits. Fourth, we look for positive stock price appreciation or relative strength over the three and six-month periods. This only means that the company is attracting a wider pool of investors. Historically, relative strength has been one of the most influential variables in predicting which stocks will outperform the market. If stock has lost its value in the three- or six-month period at the time of our re-balance, that equity will not make our screens and will not be part of the portfolio. Last, we select the top 30 stocks that have the highest 12-month price appreciation and we purchase an equal allocation of 3.3% to each one of those stocks. Q:  What are the benefits of investing in midcap? A : Our analysis suggests that mid-cap sector in the market has outperformed all other market cap segments in the last two decades. Small caps have a higher risk profile and large caps are established and have stronger balance sheets but have limited growth potential. Mid caps also tend to be less covered by sell-side analysts on Wall Street and the market segment is underrepresented in an average investor’s portfolio. Mid-cap names are less likely to be found in research reports distributed by Wall Street brokerage firms. Mid-cap companies have the best of both worlds, small and nimble enough to grow the business like a small cap company and large enough to provide the stability of a large company. Moreover, mid-cap companies generally have stronger balance sheets. That protects many mid-cap firms during difficult business conditions and provides them the stability to weather a management misstep. A mid-cap company can survive a few bumps without going out of business, which can easily happen to a small or micro-cap firm with less capital on its balance sheet. Also, for mid-cap companies to grow sales 20% is a lot easier than some large companies. Q:  How do you go about your research process? A : We start off with 10,000 companies and as we start whittling down based on our proprietary screens based on all our metrics we may be left with about 230 companies. I think the lesser followed companies may have the most room for market pricing error. We do not meet management or do company visits because we do not want to be swayed by qualitative research. We look strictly at company fundamentals and our models and we do not participate on management conference calls or in analyst meetings. We look at other things like trading liquidity and make sure that we are diversified within 30 names to meet regulatory criteria and we make sure the portfolio is not over 25% in any one subsector. We go through every 8-K and 10-K filings to research companies. The only way that we would replace one of the stocks in the portfolio is if the company restates earnings or restates results that would have precluded us from selecting through our screens originally. What we typically see within the portfolio though is one or two companies are acquired in a year. Sometimes two companies in the portfolio get merged and we will keep the merged entity in the portfolio. If a company gets acquired by another company that does not meet our criteria then the entire portfolio is allocated equally to 29 companies. Typically we do not change holdings throughout the year and wait till the year-end to rebalance the portfolio. We do monitor everything very closely to make sure that holdings are still meeting all of our criteria, however we do not change the make-up of the fund holding until our re-balance. If a stock moves up to a 1.6 price-to-sales ratio during the year would we will not sell the stock. When we do our annual rebalance, and the stock still has the 1.6 price-to-sales ratio, we would sell that stock at that time. Q:  Can you give one or two examples of your research process? A : Pier 1 Imports Inc., a retailer. The company has done well managing their growth. They are growing their revenues and earnings 8% annually, growing faster than the overall economy. They are transferring that growth to the shareholder in terms of higher earnings and the stock has done well over three-, six- and 12-month periods. I think to the company will benefit from a revived housing market. We think that companies like Pier 1 will do well as consumers start to think again about spending money on their homes as new home sales increase. Another company that we like is Mohawk Industries, Inc., the producer of floor covering products for residential and commercial applications. They have a nice defensible market position and have done well in terms of business execution. When we look at the differed spending that has happened in the housing market due to Hurricane Sandy, I think Mohawk is going to be a big winner. Our belief is people would go back to their homes after the storm to do the flooring or rebuild the house and think about refurbishing. A third example of a company that we own within the fund is Chemtura Corporation, the specialty chemicals marketer producing urethane polymers and pool and spa products and seed treatment and petroleum additives. Chemtura traded at 0.6 times the price-to-sales ratio. I think the specialty and commodity chemicals have done exceptionally well and we think that they will continue to do well. Q:  What is your buy-and-sell discipline? A : We allocate equal amount to all of our holdings, so we start with a 3.3% weighting for each of our 30 holdings. But, if a stock doubles and moves to a position of over 5% of the portfolio, we stop buying. We would not pull everything back to the 3.3% weighting and keep it equally weighted during the year. We let the winners continue to run and buy less of the losers. For the sell criteria, as we go through our rebalance process, we look at the 30 stocks that are currently included in the fund. If they don’t meet every single one of the criteria then they no longer are going to be included in the portfolio and during our rebalance we would sell the entire position. For instance, if a company grows in market cap from $8.5 billion to $10.1 billion that would exceed our upper limit of $10 billion and the stock would be precluded from the portfolio. If, at the time of rebalance, a stock has a 4% or 4.5% or 5% weighting in the portfolio, we will pare back that weighting to that 3.3% and reallocate that excess to other companies in the portfolio. Q:  Why is the rebalancing period for 12 months? A : No, we don’t set price targets. We continue to hold stocks as long as they meet our criteria and meet our trading requirements. We only rebalance portfolio on a 12-month basis because we have found that when we shorten the rebalancing period the transaction cost erodes any marginal gains that we may derive. And when we stretch it out past that 12 month period to maybe a 15 or an 18-month point, we find that that performance tends to trail off at that 15-to-18-month period as the equities do not maintain the momentum that we would like to have in the portfolio. Q:  How do you define risks and how do you manage them? A : We take that 3.3% weighting and 30 stocks for ample diversification. We do look for any restatements or any type of re-organization within the companies. That is an instant trigger for us to sell the holding. We think that by having that diversification, and not having any particular concentration within any subsector, combined with rebalancing annually, we have ample risk diversification. So if we are wrong in our selection and any holding plunges to zero that only erodes 3.3% of the portfolio and not the entire portfolio.