The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The 75/25 Blended DJIA/Treasury Index consists of 75% common stocks represented by the Dow Jones Industrial Average and 25% short-duration Treasury securities represented by the ICE BofAML U.S. 3-Month Treasury Bill Index, which comprises U.S. Treasury securities maturing in three months. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange or The Nasdaq Stock Market LLC. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
The expense ratio presented is from the most recent prospectus. The expense ratio for the current reporting period is available in the Financial Highlights section of this report.
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The accompanying notes are an integral part of these financial statements.
Percentages are stated as a percent of net assets.
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
As of April 30, 2023, the fair value of securities held as collateral for reverse repurchase agreements was $25,837,584, as noted on the Schedule of Investments.
Reverse repurchase agreements are carried at face value; hence, they are not included in the fair valuation hierarchy. The face value of the reverse repurchase agreements at April 30, 2023, was $23,387,000. Due to the short-term nature of the reverse repurchase agreements, face value approximates fair value. The face value plus interest due at maturity is equal to $23,685,634.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The Hennessy Total Return Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is total return, consisting of capital appreciation and current income. The Fund is a non-diversified fund and offers Investor Class shares.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that
security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $12,374,610 and $13,980,875, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.60%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Board has approved a Shareholder Servicing Agreement for the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing,
printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $11,470 and 7.75%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included as a component of interest expense in the Statement of Operations. The maximum amount outstanding for the Fund during the period was $398,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains. During fiscal year 2022, the capital losses utilized by the Fund were $277,833.
Capital losses sustained in or after fiscal year 2012 can be carried forward indefinitely, but any such loss retains the character of the original loss and must be utilized prior to any loss incurred before fiscal year 2012. As a result of this ordering rule, capital loss carryforwards incurred prior to fiscal year 2012 may be more likely to expire unused. Capital losses sustained prior to fiscal year 2012 can be carried forward for eight years and can be carried forward as short-term capital losses regardless of the character of the original loss.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed date and price. Reverse repurchase agreements are regarded as a form of secured borrowing by the Fund. Securities sold under reverse repurchase agreements are reflected as a liability in the Statement of Assets and Liabilities. Interest payments made under reverse repurchase agreements during the six months ended April 30, 2023 totaled $521,046 and are recorded as a component of interest expense in the Statement of Operations.
During the six months ended April 30, 2023, the average daily balance and average interest rate in effect for reverse repurchase agreements were $22,641,558 and 4.57%, respectively. Below is information about the scheduled maturity date, amount, and interest rate for outstanding reverse repurchase agreements as of April 30, 2023:
Outstanding reverse repurchase agreements as of April 30, 2023, comprised 44.64% of the Fund’s net assets.
Below is information about reverse repurchase agreements eligible for offset in the Statement of Assets and Liabilities, on both a gross and net basis:
For additional information, please refer to the “Offsetting Assets and Liabilities” section in Note 2.
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand
for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
The first line of the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The example below includes, but is not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses.
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 100.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
Hennessy Advisors, Inc.
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
U.S. Bank N.A.
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Gerald P. Richardson
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY EQUITY AND INCOME FUND
Investor Class HEIFX
Institutional Class HEIIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 5 |
| Financial Statements | | |
| Schedule of Investments | | 6 |
| Statement of Assets and Liabilities | | 17 |
| Statement of Operations | | 18 |
| Statements of Changes in Net Assets | | 19 |
| Financial Highlights | | 20 |
| Notes to the Financial Statements | | 24 |
| Expense Example | | 34 |
| Proxy Voting Policy and Proxy Voting Records | | 36 |
| Availability of Quarterly Portfolio Schedule | | 36 |
| Federal Tax Distribution Information | | 36 |
| Important Notice Regarding Delivery of Shareholder Documents | | 36 |
| Electronic Delivery | | 36 |
| Board Approval of Investment Advisory Agreements | | 37 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
 |
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Equity and Income Fund – | | | | |
| Investor Class (HEIFX) | 6.73% | 1.61% | 5.37% | 5.77% |
| Hennessy Equity and Income Fund – | | | | |
| Institutional Class (HEIIX) | 6.81% | 1.88% | 5.75% | 6.14% |
S&P 500® Index | 8.63% | 2.66% | 11.45% | 12.20% |
Expense ratios: 1.58% (Investor Class); 1.20% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. One cannot invest directly in an index. This index is used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Standard & Poor’s Financial Services is the source and owner of the S&P® and S&P 500® trademarks.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY EQUITY AND INCOME FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Berkshire Hathaway, Inc., Class B | 4.76% |
| Apple, Inc. | 4.69% |
| O’Reilly Automotive, Inc. | 3.86% |
| Alphabet, Inc., Class C | 3.46% |
| BlackRock, Inc. | 2.94% |
| Starbucks Corp. | 2.78% |
| Visa, Inc., Class A | 2.72% |
| Martin Marietta Materials, Inc. | 2.49% |
| The Progressive Corp. | 2.44% |
| Texas Instruments, Inc. | 2.38% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| COMMON STOCKS – 66.39% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Communication Services – 4.62% | | | | | | | | | |
| Alphabet, Inc., Class C (a) | | | 26,364 | | | $ | 2,853,112 | | | | 3.46 | % |
| Verizon Communications, Inc. | | | 24,575 | | | | 954,247 | | | | 1.16 | % |
| | | | | | | | 3,807,359 | | | | 4.62 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 11.58% | | | | | | | | | | | | |
| CarMax, Inc. (a) | | | 13,653 | | | | 956,120 | | | | 1.16 | % |
| Lowe’s Companies, Inc. | | | 5,569 | | | | 1,157,405 | | | | 1.41 | % |
| O’Reilly Automotive, Inc. (a) | | | 3,465 | | | | 3,178,479 | | | | 3.86 | % |
| Starbucks Corp. | | | 20,061 | | | | 2,292,772 | | | | 2.78 | % |
| The Home Depot, Inc. | | | 6,499 | | | | 1,953,209 | | | | 2.37 | % |
| | | | | | | | 9,537,985 | | | | 11.58 | % |
| | | | | | | | | | | | | |
| Consumer Staples – 6.66% | | | | | | | | | | | | |
| Altria Group, Inc. | | | 39,089 | | | | 1,857,118 | | | | 2.25 | % |
| Church & Dwight Co., Inc. | | | 18,131 | | | | 1,760,883 | | | | 2.14 | % |
| Nestlé S.A. – ADR (b) | | | 14,569 | | | | 1,868,620 | | | | 2.27 | % |
| | | | | | | | 5,486,621 | | | | 6.66 | % |
| | | | | | | | | | | | | |
| Energy – 2.46% | | | | | | | | | | | | |
| Chevron Corp. | | | 11,350 | | | | 1,913,383 | | | | 2.32 | % |
| Enbridge, Inc. (b) | | | 925 | | | | 36,778 | | | | 0.04 | % |
| Kinder Morgan, Inc. | | | 2,200 | | | | 37,730 | | | | 0.05 | % |
| The Williams Companies, Inc. | | | 1,225 | | | | 37,068 | | | | 0.05 | % |
| | | | | | | | 2,024,959 | | | | 2.46 | % |
| | | | | | | | | | | | | |
| Financials – 17.23% | | | | | | | | | | | | |
| Berkshire Hathaway, Inc., Class B (a) | | | 11,922 | | | | 3,916,973 | | | | 4.76 | % |
| BlackRock, Inc. | | | 3,603 | | | | 2,418,334 | | | | 2.94 | % |
| Fiserv, Inc. (a) | | | 15,790 | | | | 1,928,275 | | | | 2.34 | % |
| The Charles Schwab Corp. | | | 31,963 | | | | 1,669,747 | | | | 2.03 | % |
| The Progressive Corp. | | | 14,763 | | | | 2,013,673 | | | | 2.44 | % |
| Visa, Inc., Class A | | | 9,644 | | | | 2,244,448 | | | | 2.72 | % |
| | | | | | | | 14,191,450 | | | | 17.23 | % |
| | | | | | | | | | | | | |
| Health Care – 3.09% | | | | | | | | | | | | |
| Johnson & Johnson | | | 8,998 | | | | 1,472,973 | | | | 1.79 | % |
| Pfizer, Inc. | | | 27,645 | | | | 1,075,114 | | | | 1.30 | % |
| | | | | | | | 2,548,087 | | | | 3.09 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Industrials – 5.81% | | | | | | | | | |
| FedEx Corp. | | | 7,720 | | | $ | 1,758,462 | | | | 2.14 | % |
| Norfolk Southern Corp. | | | 7,717 | | | | 1,566,782 | | | | 1.90 | % |
| Old Dominion Freight Line, Inc. | | | 4,561 | | | | 1,461,299 | | | | 1.77 | % |
| | | | | | | | 4,786,543 | | | | 5.81 | % |
| | | | | | | | | | | | | |
| Information Technology – 8.53% | | | | | | | | | | | | |
| Apple, Inc. | | | 22,794 | | | | 3,867,686 | | | | 4.69 | % |
| Cisco Systems, Inc. | | | 25,514 | | | | 1,205,537 | | | | 1.46 | % |
| Texas Instruments, Inc. | | | 11,712 | | | | 1,958,246 | | | | 2.38 | % |
| | | | | | | | 7,031,469 | | | | 8.53 | % |
| | | | | | | | | | | | | |
| Materials – 6.41% | | | | | | | | | | | | |
| Air Products and Chemicals, Inc. | | | 5,627 | | | | 1,656,364 | | | | 2.01 | % |
| Martin Marietta Materials, Inc. | | | 5,652 | | | | 2,052,806 | | | | 2.49 | % |
| NewMarket Corp. | | | 3,923 | | | | 1,567,631 | | | | 1.91 | % |
| | | | | | | | 5,276,801 | | | | 6.41 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $32,622,909) | | | | | | | 54,691,274 | | | | 66.39 | % |
| | | | | | | | | | | | | |
| PREFERRED STOCKS – 2.14% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Communication Services – 0.07% | | | | | | | | | | | | |
| AT&T, Inc. | | | | | | | | | | | | |
| Series A, 5.000%, Perpetual | | | 860 | | | | 19,144 | | | | 0.02 | % |
| Series C, 4.750%, Perpetual | | | 1,935 | | | | 40,403 | | | | 0.05 | % |
| | | | | | | | 59,547 | | | | 0.07 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 0.03% | | | | | | | | | | | | |
| Ford Motor Co. | | | | | | | | | | | | |
| 6.000%, 12/01/2059 | | | 515 | | | | 12,535 | | | | 0.01 | % |
| 6.200%, 06/01/2059 | | | 613 | | | | 15,386 | | | | 0.02 | % |
| | | | | | | | 27,921 | | | | 0.03 | % |
| | | | | | | | | | | | | |
| Consumer Staples – 0.06% | | | | | | | | | | | | |
| CHS, Inc. | | | | | | | | | | | | |
| Series 3, 6.750% to 09/30/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 4.155%, Perpetual (c) | | | 840 | | | | 21,067 | | | | 0.03 | % |
| Series 4, 7.500%, Perpetual | | | 940 | | | | 24,826 | | | | 0.03 | % |
| | | | | | | | 45,893 | | | | 0.06 | % |
| | | | | | | | | | | | | |
| Financials – 1.96% | | | | | | | | | | | | |
| AEGON Funding Co. LLC, 5.100%, 12/15/2049 | | | 1,175 | | | | 26,120 | | | | 0.03 | % |
| American International Group, Inc., Series A, 5.850%, Perpetual | | | 1,635 | | | | 41,186 | | | | 0.05 | % |
The accompanying notes are an integral part of these financial statements.
| PREFERRED STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Financials (Continued) | | | | | | | | | |
| Arch Capital Group Ltd. | | | | | | | | | |
| Series G, 4.550%, Perpetual (b) | | | 1,010 | | | $ | 19,372 | | | | 0.02 | % |
| Series F, 5.450%, Perpetual (b) | | | 726 | | | | 16,850 | | | | 0.02 | % |
| Axis Capital Holdings Ltd., Series E, 5.500%, Perpetual (b) | | | 1,005 | | | | 22,824 | | | | 0.03 | % |
| Bank of America Corp. | | | | | | | | | | | | |
| Series QQ, 4.250%, Perpetual | | | 1,575 | | | | 29,752 | | | | 0.04 | % |
| Series LL, 5.000%, Perpetual | | | 1,420 | | | | 31,623 | | | | 0.04 | % |
| Series KK, 5.375%, Perpetual | | | 1,675 | | | | 39,664 | | | | 0.05 | % |
| Bank of Hawaii Corp., Series A, 4.375%, Perpetual | | | 1,160 | | | | 18,166 | | | | 0.02 | % |
| Bank OZK, Series A, 4.625%, Perpetual | | | 1,495 | | | | 23,397 | | | | 0.03 | % |
| Cadence Bank, Series A, 5.500%, Perpetual | | | 715 | | | | 15,208 | | | | 0.02 | % |
| Capital One Financial Corp. | | | | | | | | | | | | |
| Series J, 4.800%, Perpetual | | | 2,060 | | | | 40,088 | | | | 0.05 | % |
| Series I, 5.000%, Perpetual | | | 1,900 | | | | 38,988 | | | | 0.05 | % |
| Carlyle Finance LLC, 4.625%, 05/15/2061 | | | 995 | | | | 18,786 | | | | 0.02 | % |
| Citigroup, Inc., Series K, 6.875% to 11/15/2023 then | | | | | | | | | | | | |
| 3 Month CME Term SOFR + 4.392%, Perpetual (c) | | | 780 | | | | 19,789 | | | | 0.02 | % |
| Citizens Financial Group, Inc. | | | | | | | | | | | | |
| Series E, 5.000%, Perpetual | | | 1,095 | | | | 21,462 | | | | 0.03 | % |
| Series D, 6.350% to 04/06/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.642%, Perpetual (c) | | | 1,180 | | | | 27,069 | | | | 0.03 | % |
| ConnectOne Bancorp, Inc., Series A, 5.250% to 09/01/2026 | | | | | | | | | | | | |
| then 5 Year CMT Rate + 4.420%, Perpetual (c) | | | 625 | | | | 10,156 | | | | 0.01 | % |
| Cullen/Frost Bankers, Inc., Series B, 4.450%, Perpetual | | | 860 | | | | 16,761 | | | | 0.02 | % |
| Equitable Holdings, Inc., Series A, 5.250%, Perpetual | | | 1,270 | | | | 27,267 | | | | 0.03 | % |
| Federal Agricultural Mortgage Corp., Series F, 5.250%, Perpetual | | | 585 | | | | 13,127 | | | | 0.02 | % |
| Fifth Third Bancorp | | | | | | | | | | | | |
| Series K, 4.950%, Perpetual | | | 1,580 | | | | 36,024 | | | | 0.04 | % |
| Series I, 6.625% to 12/31/2023 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.710%, Perpetual (c) | | | 765 | | | | 18,742 | | | | 0.02 | % |
| First Citizens BancShares, Inc. | | | | | | | | | | | | |
| Series A, 5.375%, Perpetual | | | 1,695 | | | | 37,307 | | | | 0.05 | % |
| Series C, 5.625%, Perpetual | | | 675 | | | | 14,431 | | | | 0.02 | % |
| First Horizon Corp. | | | | | | | | | | | | |
| Series D, 6.100% to 05/01/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.859%, Perpetual (c) | | | 530 | | | | 11,761 | | | | 0.01 | % |
| Series B, 6.625% to 08/01/2025 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 4.262%, Perpetual (c) | | | 700 | | | | 16,247 | | | | 0.02 | % |
| Hartford Financial Services Group, Inc., Series G, 6.000%, Perpetual | | | 1,605 | | | | 39,740 | | | | 0.05 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| PREFERRED STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Financials (Continued) | | | | | | | | | |
| Huntington Bancshares, Inc. | | | | | | | | | |
| Series H, 4.500%, Perpetual | | | 2,275 | | | $ | 43,589 | | | | 0.06 | % |
| Series J, 6.875% to 04/15/2028 then | | | | | | | | | | | | |
| 5 Year CMT Rate + 2.704%, Perpetual (c) | | | 1,400 | | | | 34,720 | | | | 0.04 | % |
| JPMorgan Chase & Co. | | | | | | | | | | | | |
| Series JJ, 4.550%, Perpetual | | | 1,900 | | | | 40,470 | | | | 0.05 | % |
| Series LL, 4.625%, Perpetual | | | 1,875 | | | | 40,237 | | | | 0.05 | % |
| KeyCorp | | | | | | | | | | | | |
| Series G, 5.625%, Perpetual | | | 955 | | | | 20,083 | | | | 0.03 | % |
| Series F, 5.650%, Perpetual | | | 755 | | | | 16,225 | | | | 0.02 | % |
| Series E, 6.125% to 12/15/2026 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.892%, Perpetual (c) | | | 512 | | | | 11,515 | | | | 0.01 | % |
| MetLife, Inc. | | | | | | | | | | | | |
| Series F, 4.750%, Perpetual | | | 1,725 | | | | 37,657 | | | | 0.04 | % |
| Series E, 5.625%, Perpetual | | | 580 | | | | 14,500 | | | | 0.02 | % |
| Morgan Stanley | | | | | | | | | | | | |
| Series O, 4.250%, Perpetual | | | 2,365 | | | | 46,141 | | | | 0.06 | % |
| Series K, 5.850% to 04/15/2027 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.491%, Perpetual (c) | | | 1,150 | | | | 28,762 | | | | 0.03 | % |
| Series I, 6.375% to 10/15/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.708%, Perpetual (c) | | | 790 | | | | 19,853 | | | | 0.02 | % |
| Regions Financial Corp. | | | | | | | | | | | | |
| Series E, 4.450%, Perpetual | | | 1,960 | | | | 37,044 | | | | 0.04 | % |
| Series C, 5.700% to 05/15/2029 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.148%, Perpetual (c) | | | 1,035 | | | | 23,950 | | | | 0.03 | % |
| State Street Corp., Series D, 5.900% to 03/15/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.108%, Perpetual (c) | | | 1,975 | | | | 47,992 | | | | 0.06 | % |
| Synchrony Financial, Series A, 5.625%, Perpetual | | | 1,815 | | | | 30,764 | | | | 0.04 | % |
| Synovus Financial Corp. | | | | | | | | | | | | |
| Series E, 5.875% to 07/01/2024 then | | | | | | | | | | | | |
| 5 Year CMT Rate + 4.127%, Perpetual (c) | | | 1,270 | | | | 26,873 | | | | 0.03 | % |
| Series D, 6.300% to 06/21/2023 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.352%, Perpetual (c) | | | 740 | | | | 16,628 | | | | 0.02 | % |
| Texas Capital Bancshares, Inc., Series B, 5.750%, Perpetual | | | 1,110 | | | | 22,577 | | | | 0.03 | % |
| The Allstate Corp., Series H, 5.100%, Perpetual | | | 1,120 | | | | 26,712 | | | | 0.03 | % |
| The Charles Schwab Corp. | | | | | | | | | | | | |
| Series J, 4.450%, Perpetual | | | 1,495 | | | | 30,976 | | | | 0.04 | % |
| Series D, 5.950%, Perpetual | | | 765 | | | | 19,255 | | | | 0.02 | % |
| The Goldman Sachs Group, Inc., Series K, 6.375% to 05/10/2024 | | | | | | | | | | | | |
| then 3 Month CME Term SOFR + 3.550%, Perpetual (c) | | | 895 | | | | 22,581 | | | | 0.03 | % |
| Truist Financial Corp. | | | | | | | | | | | | |
| Series R, 4.750%, Perpetual | | | 2,190 | | | | 47,063 | | | | 0.06 | % |
| Series O, 5.250%, Perpetual | | | 1,625 | | | | 38,253 | | | | 0.04 | % |
The accompanying notes are an integral part of these financial statements.
| PREFERRED STOCKS | | Number of Shares/ | | | | | | % of | |
| | | Par Amount | | | Value | | | Net Assets | |
| Financials (Continued) | | | | | | | | | |
| US Bancorp | | | | | | | | | |
| Series O, 4.500%, Perpetual | | | 1,295 | | | $ | 26,521 | | | | 0.03 | % |
| Series B, 5.860% to 5/30/2023 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 0.600%, Perpetual (c) | | | 1,970 | | | | 36,721 | | | | 0.05 | % |
| Washington Federal, Inc., Series A, 4.875%, Perpetual | | | 1,395 | | | | 21,902 | | | | 0.03 | % |
| Wells Fargo & Co. | | | | | | | | | | | | |
| Series Z, 4.750%, Perpetual | | | 1,930 | | | | 38,832 | | | | 0.05 | % |
| Series Y, 5.625%, Perpetual | | | 780 | | | | 18,447 | | | | 0.02 | % |
| Series R, 6.625% to 03/15/2024 then | | | | | | | | | | | | |
| 3 Month LIBOR USD + 3.690%, Perpetual (c) | | | 1,505 | | | | 37,339 | | | | 0.04 | % |
| | | | | | | | 1,616,089 | | | | 1.96 | % |
| | | | | | | | | | | | | |
| Utilities – 0.02% | | | | | | | | | | | | |
| Entergy Arkansas LLC, 4.875%, 09/01/2066 | | | 770 | | | | 17,987 | | | | 0.02 | % |
| | | | | | | | | | | | | |
| Total Preferred Stocks | | | | | | | | | | | | |
| (Cost $2,000,091) | | | | | | | 1,767,437 | | | | 2.14 | % |
| | | | | | | | | | | | | |
| REITS – 0.03% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Real Estate – 0.03% | | | | | | | | | | | | |
| Public Storage, Series P, 4.000%, Perpetual | | | 1,185 | | | | 22,882 | | | | 0.03 | % |
| | | | | | | | | | | | | |
| Total REITS | | | | | | | | | | | | |
| (Cost $21,072) | | | | | | | 22,882 | | | | 0.03 | % |
| | | | | | | | | | | | | |
| CORPORATE BONDS – 16.43% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Communication Services – 1.66% | | | | | | | | | | | | |
| AT&T, Inc., 4.250%, 03/01/2027 | | $ | 980,000 | | | | 973,735 | | | | 1.18 | % |
| Comcast Corp., 4.650%, 02/15/2033 | | | 250,000 | | | | 253,059 | | | | 0.31 | % |
| T-Mobile USA, Inc., 3.875%, 04/15/2030 | | | 150,000 | | | | 141,132 | | | | 0.17 | % |
| | | | | | | | 1,367,926 | | | | 1.66 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 0.81% | | | | | | | | | | | | |
| Lowe’s Companies, Inc., 2.625%, 04/01/2031 | | | 325,000 | | | | 279,409 | | | | 0.34 | % |
| Starbucks Corp., 3.500%, 03/01/2028 | | | 400,000 | | | | 386,434 | | | | 0.47 | % |
| | | | | | | | 665,843 | | | | 0.81 | % |
| | | | | | | | | | | | | |
| Energy – 1.68% | | | | | | | | | | | | |
| Canadian Natural Resources Ltd., 3.900%, 02/01/2025 (b) | | | 1,000,000 | | | | 979,208 | | | | 1.19 | % |
| The Williams Companies, Inc., 2.600%, 03/15/2031 | | | 475,000 | | | | 403,138 | | | | 0.49 | % |
| | | | | | | | 1,382,346 | | | | 1.68 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| CORPORATE BONDS | | | | | | | | % of | |
| | | Par Amount | | | Value | | | Net Assets | |
| Financials – 7.65% | | | | | | | | | |
| Aflac, Inc., 3.600%, 04/01/2030 | | | 300,000 | | | $ | 282,821 | | | | 0.34 | % |
| Bank of America Corp., 2.299% to 07/21/2031 then | | | | | | | | | | | | |
| SOFR + 1.220%, 07/21/2032 (c) | | | 575,000 | | | | 463,493 | | | | 0.56 | % |
| Fifth Third Bancorp, 3.650%, 01/25/2024 | | | 225,000 | | | | 221,268 | | | | 0.27 | % |
| General Motors Financial Co., Inc., 3.700%, 05/09/2023 | | | 1,075,000 | | | | 1,074,567 | | | | 1.30 | % |
| Huntington Bancshares, Inc. | | | | | | | | | | | | |
| 2.550%, 02/04/2030 | | | 525,000 | | | | 427,131 | | | | 0.52 | % |
| 4.000%, 05/15/2025 | | | 365,000 | | | | 348,291 | | | | 0.42 | % |
| JPMorgan Chase & Co., 2.069% to 06/01/2028 then | | | | | | | | | | | | |
| SOFR + 1.015%, 06/01/2029 (c) | | | 325,000 | | | | 282,258 | | | | 0.34 | % |
| Marsh & McLennan Companies, Inc., 4.375%, 03/15/2029 | | | 275,000 | | | | 272,889 | | | | 0.33 | % |
| Morgan Stanley | | | | | | | | | | | | |
| 1.593% to 05/04/2026 then SOFR + 0.879%, 05/04/2027 (c) | | | 295,000 | | | | 265,230 | | | | 0.32 | % |
| 2.239% to 07/21/2031 then SOFR + 1.178%, 07/21/2032 (c) | | | 330,000 | | | | 266,117 | | | | 0.33 | % |
| PayPal Holdings, Inc., 2.850%, 10/01/2029 | | | 750,000 | | | | 679,806 | | | | 0.83 | % |
| Prudential Financial, Inc., 3.878%, 03/27/2028 | | | 260,000 | | | | 253,499 | | | | 0.31 | % |
| Regions Financial Corp., 1.800%, 08/12/2028 | | | 325,000 | | | | 269,845 | | | | 0.33 | % |
| State Street Corp., 4.821% to 01/26/2033 then | | | | | | | | | | | | |
| SOFR + 1.567%, 01/26/2034 (c) | | | 175,000 | | | | 174,124 | | | | 0.21 | % |
| The Goldman Sachs Group, Inc., 4.223% to 05/01/2028 then | | | | | | | | | | | | |
| 3 Month CME Term SOFR + 1.301%, 05/01/2029 (c) | | | 300,000 | | | | 287,855 | | | | 0.35 | % |
| Willis North America, Inc., 3.600%, 05/15/2024 | | | 750,000 | | | | 735,408 | | | | 0.89 | % |
| | | | | | | | 6,304,602 | | | | 7.65 | % |
| | | | | | | | | | | | | |
| Health Care – 2.11% | | | | | | | | | | | | |
| Edwards Lifesciences Corp., 4.300%, 06/15/2028 | | | 700,000 | | | | 699,679 | | | | 0.85 | % |
| Evernorth Health, Inc., 3.500%, 06/15/2024 | | | 700,000 | | | | 689,580 | | | | 0.84 | % |
| Regeneron Pharmaceuticals, Inc., 1.750%, 09/15/2030 | | | 425,000 | | | | 346,839 | | | | 0.42 | % |
| | | | | | | | 1,736,098 | | | | 2.11 | % |
| | | | | | | | | | | | | |
| Industrials – 0.81% | | | | | | | | | | | | |
| General Electric Co., 3.625%, 05/01/2030 | | | 380,000 | | | | 345,144 | | | | 0.42 | % |
| The Boeing Co., 2.196%, 02/04/2026 | | | 225,000 | | | | 208,905 | | | | 0.25 | % |
| The Timken Co., 6.875%, 05/08/2028 | | | 110,000 | | | | 116,347 | | | | 0.14 | % |
| | | | | | | | 670,396 | | | | 0.81 | % |
| | | | | | | | | | | | | |
| Information Technology – 1.71% | | | | | | | | | | | | |
| Autodesk, Inc., 2.850%, 01/15/2030 | | | 675,000 | | | | 602,683 | | | | 0.73 | % |
| Broadcom, Inc., 4.110%, 09/15/2028 | | | 425,000 | | | | 408,310 | | | | 0.50 | % |
The accompanying notes are an integral part of these financial statements.
| CORPORATE BONDS | | | | | | | | % of | |
| | | Par Amount | | | Value | | | Net Assets | |
| Information Technology (Continued) | | | | | | | | | |
| International Business Machines Corp. | | | | | | | | | |
| 2.200%, 02/09/2027 | | | 125,000 | | | $ | 115,470 | | | | 0.14 | % |
| 2.720%, 02/09/2032 | | | 325,000 | | | | 281,683 | | | | 0.34 | % |
| | | | | | | | 1,408,146 | | | | 1.71 | % |
| | | | | | | | | | | | | |
| Total Corporate Bonds | | | | | | | | | | | | |
| (Cost $14,655,128) | | | | | | | 13,535,357 | | | | 16.43 | % |
| | | | | | | | | | | | | |
| MORTGAGE-BACKED SECURITIES – 2.58% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Federal Agency Mortgage-Backed Obligations – 2.58% | | | | | | | | | | | | |
| Fannie Mae Pool | | | | | | | | | | | | |
| 3.000%, 10/01/2043 | | | 809,059 | | | | 744,088 | | | | 0.90 | % |
| 3.500%, 01/01/2042 | | | 149,831 | | | | 142,858 | | | | 0.18 | % |
| 6.000%, 10/01/2037 | | | 74,929 | | | | 76,910 | | | | 0.09 | % |
| Fannie Mae REMICS | | | | | | | | | | | | |
| Series 2013-52, 1.250%, 06/25/2043 | | | 38,120 | | | | 32,140 | | | | 0.04 | % |
| Series 2012-16, 2.000%, 11/25/2041 | | | 36,993 | | | | 33,150 | | | | 0.04 | % |
| Freddie Mac Gold Pool | | | | | | | | | | | | |
| 3.000%, 05/01/2042 | | | 431,638 | | | | 397,402 | | | | 0.48 | % |
| 3.000%, 09/01/2042 | | | 542,724 | | | | 499,684 | | | | 0.61 | % |
| 5.500%, 04/01/2037 | | | 30,133 | | | | 31,239 | | | | 0.04 | % |
| Freddie Mac REMICS | | | | | | | | | | | | |
| Series 4146, 1.500%, 10/15/2042 | | | 9,866 | | | | 9,452 | | | | 0.01 | % |
| Series 4309, 2.000%, 10/15/2043 | | | 32,859 | | | | 29,955 | | | | 0.04 | % |
| Series 3870, 2.750%, 01/15/2041 | | | 10,839 | | | | 10,426 | | | | 0.01 | % |
| Series 4322, 3.000%, 05/15/2043 | | | 48,051 | | | | 46,309 | | | | 0.05 | % |
| Government National Mortgage Association, | | | | | | | | | | | | |
| Series 2013-24, 1.750%, 02/16/2043 | | | 82,404 | | | | 72,518 | | | | 0.09 | % |
| | | | | | | | | | | | | |
| Total Mortgage-Backed Securities | | | | | | | | | | | | |
| (Cost $2,301,627) | | | | | | | 2,126,131 | | | | 2.58 | % |
| | | | | | | | | | | | | |
| U.S. TREASURY OBLIGATIONS – 9.80% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| U.S. Treasury Notes – 9.80% | | | | | | | | | | | | |
| 0.250%, 08/31/2025 | | | 1,250,000 | | | | 1,147,876 | | | | 1.39 | % |
| 0.625%, 03/31/2027 | | | 450,000 | | | | 401,027 | | | | 0.49 | % |
| 0.750%, 04/30/2026 | | | 1,500,000 | | | | 1,372,735 | | | | 1.67 | % |
| 1.250%, 12/31/2026 | | | 625,000 | | | | 573,425 | | | | 0.70 | % |
| 1.250%, 04/30/2028 | | | 425,000 | | | | 380,192 | | | | 0.46 | % |
| 1.500%, 02/15/2025 | | | 200,000 | | | | 190,684 | | | | 0.23 | % |
| 1.875%, 07/31/2026 | | | 1,550,000 | | | | 1,462,328 | | | | 1.78 | % |
| 2.125%, 03/31/2024 | | | 100,000 | | | | 97,559 | | | | 0.12 | % |
| 2.500%, 03/31/2027 | | | 200,000 | | | | 191,668 | | | | 0.23 | % |
| 2.625%, 04/15/2025 | | | 300,000 | | | | 291,609 | | | | 0.35 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| U.S. TREASURY OBLIGATIONS | | Par Amount/ | | | | | | % of | |
| | | Number of Shares | | | Value | | | Net Assets | |
| U.S. Treasury Notes (Continued) | | | | | | | | | |
| 2.750%, 08/15/2032 | | | 550,000 | | | $ | 519,535 | | | | 0.63 | % |
| 3.000%, 10/31/2025 | | | 450,000 | | | | 440,350 | | | | 0.53 | % |
| 3.500%, 02/15/2033 | | | 50,000 | | | | 50,207 | | | | 0.06 | % |
| 4.125%, 09/30/2027 | | | 350,000 | | | | 357,362 | | | | 0.43 | % |
| 4.250%, 09/30/2024 | | | 600,000 | | | | 598,254 | | | | 0.73 | % |
| | | | | | | | | | | | | |
| Total U.S. Treasury Obligations | | | | | | | | | | | | |
| (Cost $8,556,188) | | | | | | | 8,074,811 | | | | 9.80 | % |
| | | | | | | | | | | | | |
| INVESTMENT COMPANIES (EXCLUDING | | | | | | | | | | | | |
| MONEY MARKET FUNDS) – 0.54% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Financials – 0.54% | | | | | | | | | | | | |
| Ares Capital Corp. | | | 1,995 | | | | 36,867 | | | | 0.04 | % |
| Bain Capital Specialty Finance, Inc. | | | 2,655 | | | | 31,090 | | | | 0.04 | % |
| BlackRock TCP Capital Corp. | | | 3,015 | | | | 30,271 | | | | 0.04 | % |
| Carlyle Secured Lending, Inc. | | | 2,935 | | | | 41,295 | | | | 0.05 | % |
| FS KKR Capital Corp. | | | 1,865 | | | | 35,081 | | | | 0.04 | % |
| Golub Capital BDC, Inc. | | | 2,775 | | | | 37,407 | | | | 0.05 | % |
| Hercules Capital, Inc. | | | 2,325 | | | | 30,783 | | | | 0.04 | % |
| MidCap Financial Investment Corp. | | | 3,225 | | | | 36,507 | | | | 0.04 | % |
| Monroe Capital Corp. | | | 4,000 | | | | 29,160 | | | | 0.04 | % |
| New Mountain Finance Corp. | | | 3,130 | | | | 37,216 | | | | 0.04 | % |
| Oaktree Specialty Lending Corp. | | | 1,910 | | | | 36,061 | | | | 0.04 | % |
| Sixth Street Specialty Lending, Inc. | | | 1,825 | | | | 33,361 | | | | 0.04 | % |
| TriplePoint Venture Growth BDC Corp. | | | 2,500 | | | | 29,675 | | | | 0.04 | % |
| | | | | | | | | | | | | |
| Total Investment Companies | | | | | | | | | | | | |
| (Excluding Money Market Funds) | | | | | | | | | | | | |
| (Cost $550,539) | | | | | | | 444,774 | | | | 0.54 | % |
The accompanying notes are an integral part of these financial statements.
| SHORT-TERM INVESTMENTS – 1.76% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Money Market Funds – 1.76% | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | |
| Institutional Class, 4.73% (d) | | | 1,448,949 | | | $ | 1,448,949 | | | | 1.76 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $1,448,949) | | | | | | | 1,448,949 | | | | 1.76 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $62,156,503) – 99.67% | | | | | | | 82,111,615 | | | | 99.67 | % |
| Other Assets in Excess of Liabilities – 0.33% | | | | | | | 271,012 | | | | 0.33 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 82,382,627 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
ADR – American Depositary Receipt
CMT – Constant Maturity Treasury
LIBOR – London Interbank Offered Rate
REIT – Real Estate Investment Trust
SOFR – Secured Overnight Financing Rate
| (a) | Non-income-producing security. |
| (b) | U.S.-traded security of a foreign corporation. |
| (c) | Variable rate security; rate disclosed is the rate as of April 30, 2023. |
| (d) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Communication Services | | $ | 3,807,359 | | | $ | — | | | $ | — | | | $ | 3,807,359 | |
| Consumer Discretionary | | | 9,537,985 | | | | — | | | | — | | | | 9,537,985 | |
| Consumer Staples | | | 5,486,621 | | | | — | | | | — | | | | 5,486,621 | |
| Energy | | | 2,024,959 | | | | — | | | | — | | | | 2,024,959 | |
| Financials | | | 14,191,450 | | | | — | | | | — | | | | 14,191,450 | |
| Health Care | | | 2,548,087 | | | | — | | | | — | | | | 2,548,087 | |
| Industrials | | | 4,786,543 | | | | — | | | | — | | | | 4,786,543 | |
| Information Technology | | | 7,031,469 | | | | — | | | | — | | | | 7,031,469 | |
| Materials | | | 5,276,801 | | | | — | | | | — | | | | 5,276,801 | |
| Total Common Stocks | | $ | 54,691,274 | | | $ | — | | | $ | — | | | $ | 54,691,274 | |
| Preferred Stocks | | | | | | | | | | | | | | | | |
| Communication Services | | $ | 59,547 | | | $ | — | | | $ | — | | | $ | 59,547 | |
| Consumer Discretionary | | | 27,921 | | | | — | | | | — | | | | 27,921 | |
| Consumer Staples | | | 45,893 | | | | — | | | | — | | | | 45,893 | |
| Financials | | | 1,616,089 | | | | — | | | | — | | | | 1,616,089 | |
| Utilities | | | 17,987 | | | | — | | | | — | | | | 17,987 | |
| Total Preferred Stocks | | $ | 1,767,437 | | | $ | — | | | $ | — | | | $ | 1,767,437 | |
| REITS | | | | | | | | | | | | | | | | |
| Real Estate | | $ | 22,882 | | | $ | — | | | $ | — | | | $ | 22,882 | |
| Total REITS | | $ | 22,882 | | | $ | — | | | $ | — | | | $ | 22,882 | |
| Corporate Bonds | | | | | | | | | | | | | | | | |
| Communication Services | | $ | — | | | $ | 1,367,926 | | | $ | — | | | $ | 1,367,926 | |
| Consumer Discretionary | | | — | | | | 665,843 | | | | — | | | | 665,843 | |
| Energy | | | — | | | | 1,382,346 | | | | — | | | | 1,382,346 | |
| Financials | | | — | | | | 6,304,602 | | | | — | | | | 6,304,602 | |
| Health Care | | | — | | | | 1,736,098 | | | | — | | | | 1,736,098 | |
| Industrials | | | — | | | | 670,396 | | | | — | | | | 670,396 | |
| Information Technology | | | — | | | | 1,408,146 | | | | — | | | | 1,408,146 | |
| Total Corporate Bonds | | $ | — | | | $ | 13,535,357 | | | $ | — | | | $ | 13,535,357 | |
| Mortgage-Backed Securities | | | | | | | | | | | | | | | | |
| Federal Agency Mortgage-Backed Obligations | | $ | — | | | $ | 2,126,131 | | | $ | — | | | $ | 2,126,131 | |
| Total Mortgage-Backed Securities | | $ | — | | | $ | 2,126,131 | | | $ | — | | | $ | 2,126,131 | |
| U.S. Treasury Obligations | | | | | | | | | | | | | | | | |
| U.S. Treasury Notes | | $ | — | | | $ | 8,074,811 | | | $ | — | | | $ | 8,074,811 | |
| Total U.S. Treasury Obligations | | $ | — | | | $ | 8,074,811 | | | $ | — | | | $ | 8,074,811 | |
| Investment Companies | | | | | | | | | | | | | | | | |
| (Excluding Money Market Funds) | | | | | | | | | | | | | | | | |
| Financials | | $ | 444,774 | | | $ | — | | | $ | — | | | $ | 444,774 | |
| Total Investment Companies | | | | | | | | | | | | | | | | |
| (Excluding Money Market Funds) | | $ | 444,774 | | | $ | — | | | $ | — | | | $ | 444,774 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 1,448,949 | | | $ | — | | | $ | — | | | $ | 1,448,949 | |
| Total Short-Term Investments | | $ | 1,448,949 | | | $ | — | | | $ | — | | | $ | 1,448,949 | |
| Total Investments | | $ | 58,375,316 | | | $ | 23,736,299 | | | $ | — | | | $ | 82,111,615 | |
The accompanying notes are an integral part of these financial statements.
| SCHEDULE OF INVESTMENTS/STATEMENT OF ASSETS AND LIABILITIES |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $62,156,503) | | $ | 82,111,615 | |
| Dividends and interest receivable | | | 278,054 | |
| Receivable for fund shares sold | | | 408 | |
| Receivable for securities sold | | | 118,551 | |
| Prepaid expenses and other assets | | | 20,353 | |
| Total assets | | | 82,528,981 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for fund shares redeemed | | | 31,491 | |
| Payable to advisor | | | 53,917 | |
| Payable to sub-transfer agents | | | 16,365 | |
| Payable to administrator | | | 14,596 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 7,460 | |
| Accrued service fees | | | 3,104 | |
| Accrued trustees fees | | | 5,129 | |
| Accrued expenses and other payables | | | 3,066 | |
| Total liabilities | | | 146,354 | |
| NET ASSETS | | $ | 82,382,627 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 59,741,787 | |
| Total distributable earnings | | | 22,640,840 | |
| Total net assets | | $ | 82,382,627 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 37,995,897 | |
| Shares issued and outstanding | | | 2,608,234 | |
| Net asset value, offering price, and redemption price per share | | $ | 14.57 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 44,386,730 | |
| Shares issued and outstanding | | | 3,246,038 | |
| Net asset value, offering price, and redemption price per share | | $ | 13.67 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 578,194 | |
| Interest income | | | 391,246 | |
| Total investment income | | | 969,440 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 338,644 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 42,668 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 26,982 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 45,326 | |
| Distribution fees – Investor Class (See Note 5) | | | 28,793 | |
| Service fees – Investor Class (See Note 5) | | | 19,195 | |
| Federal and state registration fees | | | 15,461 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Trustees’ fees and expenses | | | 9,831 | |
| Reports to shareholders | | | 6,340 | |
| Legal fees | | | 806 | |
| Interest expense (See Note 7) | | | 90 | |
| Other expenses | | | 7,421 | |
| Total expenses | | | 564,628 | |
| NET INVESTMENT INCOME | | $ | 404,812 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments: | | $ | 2,889,815 | |
| Net change in unrealized appreciation/depreciation on investments: | | | 2,317,802 | |
| Net gain on investments | | | 5,207,617 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 5,612,429 | |
(1) | Net of foreign taxes withheld and issuance fees of $7,191. |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 404,812 | | | $ | 757,118 | |
| Net realized gain on investments | | | 2,889,815 | | | | 2,841,084 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | 2,317,802 | | | | (17,205,736 | ) |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | 5,612,429 | | | | (13,607,534 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (1,161,239 | ) | | | (3,654,611 | ) |
| Distributable earnings – Institutional Class | | | (1,502,545 | ) | | | (4,723,563 | ) |
| Total distributions | | | (2,663,784 | ) | | | (8,378,174 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 189,433 | | | | 1,881,768 | |
| Proceeds from shares subscribed – Institutional Class | | | 862,846 | | | | 2,382,337 | |
| Dividends reinvested – Investor Class | | | 1,127,928 | | | | 3,556,955 | |
| Dividends reinvested – Institutional Class | | | 1,107,029 | | | | 3,602,091 | |
| Cost of shares redeemed – Investor Class | | | (3,853,644 | ) | | | (10,361,778 | ) |
| Cost of shares redeemed – Institutional Class | | | (6,913,848 | ) | | | (12,193,431 | ) |
| Net decrease in net assets derived | | | | | | | | |
| from capital share transactions | | | (7,480,256 | ) | | | (11,132,058 | ) |
| TOTAL DECREASE IN NET ASSETS | | | (4,531,611 | ) | | | (33,117,766 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 86,914,238 | | | | 120,032,004 | |
| End of period | | $ | 82,382,627 | | | $ | 86,914,238 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 13,356 | | | | 115,566 | |
| Shares sold – Institutional Class | | | 64,444 | | | | 160,649 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 79,239 | | | | 217,125 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 82,887 | | | | 234,876 | |
| Shares redeemed – Investor Class | | | (269,681 | ) | | | (673,769 | ) |
| Shares redeemed – Institutional Class | | | (516,636 | ) | | | (853,794 | ) |
| Net decrease in shares outstanding | | | (546,391 | ) | | | (799,347 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 14.06 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.06 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 0.88 | |
| Total from investment operations | | | 0.94 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.05 | ) |
| Dividends from net realized gains | | | (0.38 | ) |
| Total distributions | | | (0.43 | ) |
| Net asset value, end of period | | $ | 14.57 | |
| | | | | |
| TOTAL RETURN | | | 6.73 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 38.00 | |
| Ratio of expenses to average net assets | | | 1.53 | %(3) |
| Ratio of net investment income to average net assets | | | 0.76 | %(3) |
Portfolio turnover rate(4) | | | 4 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 17.26 | | | $ | 15.12 | | | $ | 15.72 | | | $ | 15.82 | | | $ | 16.24 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.08 | (1) | | | 0.09 | (1) | | | 0.16 | (1) | | | 0.18 | (1) | | | 0.16 | |
| | (2.09 | ) | | | 3.01 | | | | 0.40 | | | | 1.02 | | | | 0.40 | |
| | (2.01 | ) | | | 3.10 | | | | 0.56 | | | | 1.20 | | | | 0.56 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.08 | ) | | | (0.10 | ) | | | (0.16 | ) | | | (0.17 | ) | | | (0.14 | ) |
| | (1.11 | ) | | | (0.86 | ) | | | (1.00 | ) | | | (1.13 | ) | | | (0.84 | ) |
| | (1.19 | ) | | | (0.96 | ) | | | (1.16 | ) | | | (1.30 | ) | | | (0.98 | ) |
| $ | 14.06 | | | $ | 17.26 | | | $ | 15.12 | | | $ | 15.72 | | | $ | 15.82 | |
| | | | | | | | | | | | | | | | | | | |
| | -12.60 | % | | | 21.24 | % | | | 3.74 | % | | | 8.39 | % | | | 3.44 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 39.17 | | | $ | 53.97 | | | $ | 51.29 | | | $ | 93.51 | | | $ | 121.32 | |
| | 1.51 | % | | | 1.49 | % | | | 1.49 | % | | | 1.46 | % | | | 1.42 | % |
| | 0.53 | % | | | 0.54 | % | | | 1.08 | % | | | 1.16 | % | | | 0.89 | % |
| | 15 | % | | | 26 | % | | | 22 | % | | | 16 | % | | | 18 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 13.21 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.08 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 0.81 | |
| Total from investment operations | | | 0.89 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.07 | ) |
| Dividends from net realized gains | | | (0.36 | ) |
| Total distributions | | | (0.43 | ) |
| Net asset value, end of period | | $ | 13.67 | |
| | | | | |
| TOTAL RETURN | | | 6.81 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 44.39 | |
| Ratio of expenses to average net assets | | | 1.17 | %(3) |
| Ratio of net investment income to average net assets | | | 1.12 | %(3) |
Portfolio turnover rate(4) | | | 4 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 16.22 | | | $ | 14.22 | | | $ | 14.80 | | | $ | 14.93 | | | $ | 15.34 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.13 | (1) | | | 0.14 | (1) | | | 0.20 | (1) | | | 0.22 | (1) | | | 0.19 | |
| | (1.97 | ) | | | 2.83 | | | | 0.38 | | | | 0.96 | | | | 0.39 | |
| | (1.84 | ) | | | 2.97 | | | | 0.58 | | | | 1.18 | | | | 0.58 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.13 | ) | | | (0.16 | ) | | | (0.22 | ) | | | (0.24 | ) | | | (0.20 | ) |
| | (1.04 | ) | | | (0.81 | ) | | | (0.94 | ) | | | (1.07 | ) | | | (0.79 | ) |
| | (1.17 | ) | | | (0.97 | ) | | | (1.16 | ) | | | (1.31 | ) | | | (0.99 | ) |
| $ | 13.21 | | | $ | 16.22 | | | $ | 14.22 | | | $ | 14.80 | | | $ | 14.93 | |
| | | | | | | | | | | | | | | | | | | |
| | -12.25 | % | | | 21.68 | % | | | 4.16 | % | | | 8.76 | % | | | 3.86 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 47.74 | | | $ | 66.06 | | | $ | 61.75 | | | $ | 80.40 | | | $ | 97.86 | |
| | 1.13 | % | | | 1.12 | % | | | 1.12 | % | | | 1.09 | % | | | 1.02 | % |
| | 0.90 | % | | | 0.91 | % | | | 1.44 | % | | | 1.53 | % | | | 1.28 | % |
| | 15 | % | | | 26 | % | | | 22 | % | | | 16 | % | | | 18 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Equity and Income Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is long-term capital growth and current income. The Fund is a diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid at the end of each calendar quarter. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | REIT Equity Securities – Distributions received from real estate investment trusts (“REITs”) may be classified as dividends, capital gains, or return of capital. Investments in REITs may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make any required distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. At other times, investments in a REIT may result in the Fund’s receipt of cash in excess of the REIT’s earnings. If the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for U.S. federal income tax purposes. Dividends received by the Fund from a REIT generally do not constitute qualified dividend income and do not qualify for the dividends-received deduction. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
| | |
| | In March 2020, FASB issued Accounting Standards Update 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The main objective of the new guidance was to provide relief to companies that would be impacted by the expected change in benchmark interest rates at the end of 2021, when participating banks would no longer be required to submit London Interbank Offered Rate (“LIBOR”) quotes by the UK Financial Conduct Authority. The new guidance allows companies to account for contract modifications as a continuance of the existing contract without additional analysis, provided that the only change to existing contracts is a change to an approved benchmark interest rate. In addition, derivative contracts that qualified for hedge accounting prior to contract modification will be allowed to continue to receive such treatment even if critical terms change due to a change in the benchmark interest rate. For new and existing contracts, the Fund may elect to apply the amendments as of March 12, 2020 through December 31, 2022. See Note 9 for more information. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| NOTES TO THE FINANCIAL STATEMENTS |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $3,495,344 and $12,462,575, respectively.
Purchases and sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023, were $144,896 and $815,635, respectively.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor oversees the provision of investment advice and
| NOTES TO THE FINANCIAL STATEMENTS |
furnishes office space, facilities, and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.80%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Advisor has delegated the day-to-day management of the equity allocation of the Fund to a sub-advisor, The London Company of Virginia, LLC, and has delegated the day-to-day management of the fixed income allocation of the Fund to a sub-advisor, FCI Advisors. The Advisor pays the sub-advisory fees from its own assets, and these fees are not an additional expense of the Fund. During the six months ended April 30, 2023, the Advisor (not the Fund) paid a sub-advisory fee at the rate of 0.33% of the daily net assets of the equity allocation of the Fund and 0.27% of the daily net assets of the fixed income allocation of the Fund.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule
| HENNESSY FUNDS | 1-800-966-4354 | |
that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $2,298 and 7.75%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included in the Statement of Operations. The maximum amount outstanding for the Fund during the period was $110,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
| NOTES TO THE FINANCIAL STATEMENTS |
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 69,340,330 | |
| | Gross tax unrealized appreciation | | $ | 22,371,738 | |
| | Gross tax unrealized depreciation | | | (4,995,353 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 17,376,385 | |
| | Undistributed ordinary income | | $ | 17,120 | |
| | Undistributed long-term capital gains | | | 2,298,690 | |
| | Total distributable earnings | | $ | 2,315,810 | |
| | Other accumulated gain/(loss) | | $ | — | |
| | Total accumulated gain/(loss) | | $ | 19,692,195 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 365,073 | | | $ | 779,687 | |
| | Long-term capital gains | | | 2,298,711 | | | | 7,598,487 | |
| | Total distributions | | $ | 2,663,784 | | | $ | 8,378,174 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). LIBOR TRANSITION
The Fund invests in securities of financial institutions that may be involved in financings based on, among other floating rates, LIBOR. Determined by the ICE Benchmark Administration, LIBOR is an average interest rate that banks charge one another for the use of short-term money. In 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced plans to phase out the use of LIBOR by the end of 2021. Most LIBOR settings are no longer being published as of December 31, 2021, and the FCA and ICE Benchmark Administrator have announced that a majority of U.S. dollar LIBOR settings will cease publication after June 30, 2023. The U.S. Federal Reserve has begun publishing the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR. Other regulators and industry groups around the world have announced or begun publishing proposed alternative reference rates for other currencies, but global consensus is lacking, and the process for amending many existing contracts or instruments to transition away from LIBOR remains unclear. Uncertainty related to the liquidity impact of the change in reference rates and how to
| HENNESSY FUNDS | 1-800-966-4354 | |
appropriately adjust these rates at the time of transition may lead to increased volatility and illiquidity in markets tied to LIBOR, reduce the value of LIBOR-related instruments, and reduce the effectiveness of hedging strategies, which could adversely affect the Fund’s performance. Moreover, the risks associated with this discontinuation and transition could be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on the Fund until new reference rates and fallbacks for both legacy and new instruments and contracts are commercially accepted and market practices become settled.
10). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
11). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| NOTES TO THE FINANCIAL STATEMENTS |
(This Page Intentionally Left Blank.)
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,067.30 | $15.81 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,034.70 | $15.57 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,068.10 | $12.10 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,038.30 | $11.92 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.53% for Investor Class shares or 1.17% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 100.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 5.34%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
Board Approval of Investment Advisory
Agreements
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”), the sub-advisory agreement for the equity allocation of the Fund between the Advisor and The London Company, LLC, and the sub-advisory agreement for the fixed income allocation of the Fund between the Advisor and FCI Advisors (with The London Company, LLC and FCI Advisors each herein referred to individually as a “Sub-Advisor” and together as the “Sub-Advisors”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory and sub-advisory agreements. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory and sub-advisory agreements.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory and sub-advisory agreements. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory and sub-advisory agreements and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory and sub-advisory agreements and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | Summaries of the advisory and sub-advisory agreements; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the Sub-Advisors and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale; |
| | | |
| | (9) | A completed questionnaire from each Sub-Advisor; |
| | | |
| | (10) | Summaries of each Sub-Advisor’s questionnaire and relevant information from such Sub-Advisor’s Form ADV Parts I and II; |
| | | |
| | (11) | Financial information for the holding company of each Sub-Advisor; and |
| | | |
| | (12) | Each Sub-Advisor’s Code of Ethics. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory and
| HENNESSY FUNDS | 1-800-966-4354 | |
sub-advisory agreements. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory and sub-advisory agreements, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor and the Sub-Advisors; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| | | |
| | (4) | The costs and profitability of the Fund to the Advisor and the Sub-Advisors; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor and the Sub-Advisors from serving as an investment advisor to the Fund (other than the advisory and sub-advisory fees). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor oversees the Sub-Advisors for the Fund, and the Sub-Advisors act as the portfolio managers for the Fund by providing portfolio management services. |
| | | | |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Sub-Advisors and the Fund’s other service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Sub-Advisors and the Fund’s other service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
| | | (f) | The Advisor oversees the selection and continued employment of each Sub-Advisor, reviews the Fund’s investment performance, and monitors each Sub-Advisor’s adherence to the Fund’s investment objectives, policies, and restrictions. |
| | | | |
| | | (g) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (h) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| | | | |
| | | (i) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (j) | For each annual report of the Fund, the Advisor reviews the written summaries prepared by the Sub-Advisors of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (k) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (l) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (m) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (n) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees considered the services identified below that are provided by each Sub-Advisor. Based on this review and an assessment of each Sub-Advisor’s performance, the Trustees concluded that each Sub-Advisor provides high-quality services to the Fund. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by each Sub-Advisor and that the nature and extent of the services provided by each Sub-Advisor were appropriate to assure that the Fund’s portfolio aligns properly with its investment objective and principal investment strategies. |
| | | (a) | Each Sub-Advisor acts as the portfolio manager for the Fund. In this capacity, each Sub-Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; and |
| | | | | |
| | | | (iii) | manages proxy voting for the Fund. |
| | | (b) | Each Sub-Advisor ensures that its compliance program includes policies and procedures relevant to the Fund and the Sub-Advisor’s duties as a portfolio manager to the Fund. |
| | | | |
| | | (c) | For each annual report of the Fund, each Sub-Advisor prepares a written summary of the Fund’s performance (with respect to the equity allocation or the fixed income allocation, as applicable) during the most recent 12-month period. |
| | | | |
| | | (d) | Each Sub-Advisor provides a quarterly compliance certification to the Board regarding trading and allocation practices, supervisory matters, the Sub-Advisor’s compliance program (including its code of ethics), compliance with the Fund’s policies, and general firm updates. |
| | (3) | Trustees considered the distinction between the services performed by the Advisor and the Sub-Advisors. The Trustees noted that the management of the Fund, including the oversight of the Sub-Advisors, involves more comprehensive and substantive duties than the duties of the Sub-Advisors. Specifically, the Trustees considered the lists of Advisor services previously identified and concluded that the services performed by the Advisor for the Fund require a higher level of service and oversight than the services performed by the Sub-Advisors. Based on this determination, the Trustees concluded that the differential in advisory fees between the Advisor and the Sub-Advisors is reasonable. |
| | | |
| | (4) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor and the Sub-Advisors manage the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory and sub-advisory agreements. |
| | | |
| | (5) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory and sub-advisory agreements. |
| | | |
| | (6) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees and sub-advisory fees increase as the Fund’s assets grow. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
| | (7) | The Trustees considered the profitability of the Advisor and the Sub-Advisors, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor and the Sub-Advisors are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (8) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (9) | The Trustees considered any benefits to the Advisor and the Sub-Advisors from serving as an advisor to the Fund (other than the advisory and sub-advisory fees). The Trustees noted that the Advisor and the Sub-Advisors may derive ancillary benefits from, by way of example, their association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor and the Sub-Advisors from their relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ findings that (i) the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s and the Sub-Advisors’ own efforts in the performance of their duties under the advisory and sub-advisory agreements and (ii) although the Sub-Advisors could derive benefits from the conversion of Fund shareholders into separate account clients, the Fund also could benefit from potential institutional shareholders who might choose to invest in the Fund. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor and the Sub-Advisors, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s and the Sub-Advisors’ written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory and sub-advisory agreements.
| HENNESSY FUNDS | 1-800-966-4354 | |
For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY BALANCED FUND
Investor Class HBFBX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 8 |
| Statement of Operations | | 9 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 14 |
| Expense Example | | 21 |
| Proxy Voting Policy and Proxy Voting Records | | 22 |
| Availability of Quarterly Portfolio Schedule | | 22 |
| Federal Tax Distribution Information | | 22 |
| Important Notice Regarding Delivery of Shareholder Documents | | 22 |
| Electronic Delivery | | 22 |
| Board Approval of Investment Advisory Agreement | | 23 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Balanced Fund (HBFBX) | 0.96% | -1.15% | 2.72% | 3.57% |
| 50/50 Blended DJIA/Treasury Index | 3.83% | 4.09% | 5.79% | 6.23% |
| Dow Jones Industrial Average | 5.29% | 5.64% | 9.49% | 11.22% |
Expense ratio: 1.80%
(1) | Periods of less than one year are not annualized. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The 50/50 Blended DJIA/Treasury Index consists of 50% common stocks represented by the Dow Jones Industrial Average and 50% short-duration Treasury securities represented by the ICE BofAML 1-Year U.S. Treasury Note Index, which comprises U.S. Treasury securities maturing in approximately one year. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange or The Nasdaq Stock Market LLC. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
The expense ratio presented is from the most recent prospectus. The expense ratio for the current reporting period is available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY BALANCED FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| U.S. Treasury Bill, 4.470%, 01/25/2024 | 19.79% |
| U.S. Treasury Bill, 4.555%, 11/30/2023 | 10.36% |
| U.S. Treasury Bill, 4.750%, 06/15/2023 | 9.79% |
| U.S. Treasury Bill, 4.350%, 05/18/2023 | 7.36% |
| Cisco Systems Inc. | 5.38% |
| Intel Corp. | 5.33% |
| Walgreens Boots Alliance, Inc. | 5.13% |
| Dow, Inc. | 5.03% |
| Verizon Communications, Inc. | 4.99% |
| Chevron Corp. | 4.90% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 49.23% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Communication Services – 4.99% | | | | | | | | | |
| Verizon Communications, Inc. | | | 15,700 | | | $ | 609,631 | | | | 4.99 | % |
| | | | | | | | | | | | | |
| Consumer Staples – 5.13% | | | | | | | | | | | | |
| Walgreens Boots Alliance, Inc. | | | 17,800 | | | | 627,450 | | | | 5.13 | % |
| | | | | | | | | | | | | |
| Energy – 4.90% | | | | | | | | | | | | |
| Chevron Corp. | | | 3,550 | | | | 598,459 | | | | 4.90 | % |
| | | | | | | | | | | | | |
| Financials – 4.19% | | | | | | | | | | | | |
| JPMorgan Chase & Co. | | | 3,700 | | | | 511,488 | | | | 4.19 | % |
| | | | | | | | | | | | | |
| Health Care – 4.81% | | | | | | | | | | | | |
| Amgen, Inc. | | | 2,450 | | | | 587,363 | | | | 4.81 | % |
| | | | | | | | | | | | | |
| Industrials – 4.61% | | | | | | | | | | | | |
| 3M Co. | | | 5,300 | | | | 562,966 | | | | 4.61 | % |
| | | | | | | | | | | | | |
| Information Technology – 15.57% | | | | | | | | | | | | |
| Cisco Systems, Inc. | | | 13,900 | | | | 656,775 | | | | 5.38 | % |
| Intel Corp. | | | 20,950 | | | | 650,707 | | | | 5.33 | % |
| International Business Machines Corp. | | | 4,700 | | | | 594,127 | | | | 4.86 | % |
| | | | | | | | 1,901,609 | | | | 15.57 | % |
| | | | | | | | | | | | | |
| Materials – 5.03% | | | | | | | | | | | | |
| Dow, Inc. | | | 11,300 | | | | 614,720 | | | | 5.03 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $5,990,220) | | | | | | | 6,013,686 | | | | 49.23 | % |
The accompanying notes are an integral part of these financial statements.
| SHORT-TERM INVESTMENTS – 50.79% | | Number of Shares/ | | | | | | % of | |
| | | Par Amount | | | Value | | | Net Assets | |
| Money Market Funds – 3.49% | | | | | | | | | |
| First American Government Obligations | | | | | | | | | |
| Fund, Institutional Class, 4.73% (a) | | | 426,855 | | | $ | 426,855 | | | | 3.49 | % |
| | | | | | | | | | | | | |
| U.S. Treasury Bills – 47.30% | | | | | | | | | | | | |
| 4.350%, 05/18/2023 (b) | | | 900,000 | | | | 899,143 | | | | 7.36 | % |
| 4.750%, 06/15/2023 (b) | | | 1,200,000 | | | | 1,195,725 | | | | 9.79 | % |
| 4.555%, 11/30/2023 (b) | | | 1,300,000 | | | | 1,266,010 | | | | 10.36 | % |
| 4.470%, 1/25/2024 (b) | | | 2,500,000 | | | | 2,416,475 | | | | 19.79 | % |
| | | | | | | | 5,777,353 | | | | 47.30 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $6,204,850) | | | | | | | 6,204,208 | | | | 50.79 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $12,195,070) – 100.02% | | | | | | | 12,217,894 | | | | 100.02 | % |
| Liabilities in Excess of Other Assets – (0.02)% | | | | | | | (2,723 | ) | | | (0.02 | )% |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 12,215,171 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
| (a) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
| (b) | The rate listed is the discount rate at issue. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Communication Services | | $ | 609,631 | | | $ | — | | | $ | — | | | $ | 609,631 | |
| Consumer Staples | | | 627,450 | | | | — | | | | — | | | | 627,450 | |
| Energy | | | 598,459 | | | | — | | | | — | | | | 598,459 | |
| Financials | | | 511,488 | | | | — | | | | — | | | | 511,488 | |
| Health Care | | | 587,363 | | | | — | | | | — | | | | 587,363 | |
| Industrials | | | 562,966 | | | | — | | | | — | | | | 562,966 | |
| Information Technology | | | 1,901,609 | | | | — | | | | — | | | | 1,901,609 | |
| Materials | | | 614,720 | | | | — | | | | — | | | | 614,720 | |
| Total Common Stocks | | $ | 6,013,686 | | | $ | — | | | $ | — | | | $ | 6,013,686 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 426,855 | | | $ | — | | | $ | — | | | $ | 426,855 | |
| U.S. Treasury Bills | | | — | | | | 5,777,353 | | | | — | | | | 5,777,353 | |
| Total Short-Term Investments | | $ | 426,855 | | | $ | 5,777,353 | | | $ | — | | | $ | 6,204,208 | |
| Total Investments | | $ | 6,440,541 | | | $ | 5,777,353 | | | $ | — | | | $ | 12,217,894 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $12,195,070) | | $ | 12,217,894 | |
| Dividends and interest receivable | | | 15,623 | |
| Receivable for fund shares sold | | | 298 | |
| Prepaid expenses and other assets | | | 11,064 | |
| Total assets | | | 12,244,879 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable to advisor | | | 6,053 | |
| Payable to administrator | | | 2,430 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 1,663 | |
| Accrued service fees | | | 1,009 | |
| Accrued trustees fees | | | 4,823 | |
| Accrued expenses and other payables | | | 2,504 | |
| Total liabilities | | | 29,708 | |
| NET ASSETS | | $ | 12,215,171 | |
| | | | | |
| NET ASSETS CONSIST OF: | | | | |
| Capital stock | | $ | 12,178,459 | |
| Total distributable earnings | | | 36,712 | |
| Total net assets | | $ | 12,215,171 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 12,215,171 | |
| Shares issued and outstanding | | | 1,071,338 | |
| Net asset value, offering price, and redemption price per share | | $ | 11.40 | |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF ASSETS AND LIABILITIES/STATEMENT OF OPERATIONS |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
| Dividend income | | $ | 136,464 | |
| Interest income | | | 97,630 | |
| Total investment income | | | 234,094 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 38,008 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 10,787 | |
| Distribution fees – Investor Class (See Note 5) | | | 9,502 | |
| Federal and state registration fees | | | 9,363 | |
| Trustees’ fees and expenses | | | 9,226 | |
| Service fees – Investor Class (See Note 5) | | | 6,334 | |
| Reports to shareholders | | | 2,921 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 2,517 | |
| Legal fees | | | 186 | |
| Other expenses | | | 2,353 | |
| Total expenses | | | 114,268 | |
| NET INVESTMENT INCOME | | $ | 119,826 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 16,046 | |
| Net change in unrealized appreciation/depreciation on investments | | | (15,260 | ) |
| Net gain on investments | | | 786 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 120,612 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
| STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 119,826 | | | $ | 66,939 | |
| Net realized gain on investments | | | 16,046 | | | | 492,822 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | (15,260 | ) | | | (683,111 | ) |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | 120,612 | | | | (123,350 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (584,812 | ) | | | (524,145 | ) |
| Total distributions | | | (584,812 | ) | | | (524,145 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 511,125 | | | | 2,103,328 | |
| Dividends reinvested – Investor Class | | | 577,328 | | | | 519,982 | |
| Cost of shares redeemed – Investor Class | | | (1,301,599 | ) | | | (2,614,494 | ) |
| Net increase (decrease) in net assets | | | | | | | | |
| derived from capital share transactions | | | (213,146 | ) | | | 8,816 | |
| TOTAL DECREASE IN NET ASSETS | | | (677,346 | ) | | | (638,679 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 12,892,517 | | | | 13,531,196 | |
| End of period | | $ | 12,215,171 | | | $ | 12,892,517 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 44,385 | | | | 173,711 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 49,647 | | | | 43,919 | |
| Shares redeemed – Investor Class | | | (112,996 | ) | | | (219,333 | ) |
| Net decrease in shares outstanding | | | (18,964 | ) | | | (1,703 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 11.82 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.11 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 0.01 | |
| Total from investment operations | | | 0.12 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.10 | ) |
| Dividends from net realized gains | | | (0.44 | ) |
| Total distributions | | | (0.54 | ) |
| Net asset value, end of period | | $ | 11.40 | |
| | | | | |
| TOTAL RETURN | | | 0.96 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 12.22 | |
| Ratio of expenses to average net assets | | | 1.80 | %(3) |
| Ratio of net investment income to average net assets | | | 1.89 | %(3) |
| Portfolio turnover rate | | | 6 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 12.39 | | | $ | 10.84 | | | $ | 12.38 | | | $ | 12.34 | | | $ | 12.88 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.06 | (1) | | | 0.02 | (1) | | | 0.12 | (1) | | | 0.13 | (1) | | | 0.09 | |
| | (0.15 | ) | | | 1.56 | | | | (1.04 | ) | | | 0.59 | | | | 0.33 | |
| | (0.09 | ) | | | 1.58 | | | | (0.92 | ) | | | 0.72 | | | | 0.42 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.05 | ) | | | (0.03 | ) | | | (0.12 | ) | | | (0.13 | ) | | | (0.08 | ) |
| | (0.43 | ) | | | — | | | | (0.50 | ) | | | (0.55 | ) | | | (0.88 | ) |
| | (0.48 | ) | | | (0.03 | ) | | | (0.62 | ) | | | (0.68 | ) | | | (0.96 | ) |
| $ | 11.82 | | | $ | 12.39 | | | $ | 10.84 | | | $ | 12.38 | | | $ | 12.34 | |
| | | | | | | | | | | | | | | | | | | |
| | -0.70 | % | | | 14.62 | % | | | -7.84 | % | | | 6.05 | % | | | 3.46 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 12.89 | | | $ | 13.53 | | | $ | 11.99 | | | $ | 12.30 | | | $ | 11.62 | |
| | 1.80 | % | | | 1.85 | % | | | 1.89 | % | | | 1.88 | % | | | 1.84 | % |
| | 0.49 | % | | | 0.17 | % | | | 1.05 | % | | | 1.04 | % | | | 0.70 | % |
| | 29 | % | | | 31 | % | | | 42 | % | | | 52 | % | | | 21 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Balanced Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is a combination of capital appreciation and current income. The Fund is a non-diversified fund and offers Investor Class shares.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
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| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
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| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
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| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. |
| NOTES TO THE FINANCIAL STATEMENTS |
| | Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. |
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| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid at the end of each calendar quarter. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
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| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
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| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
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| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
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| i). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
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| j). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (he “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
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| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
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| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
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| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. |
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| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
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| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In |
| NOTES TO THE FINANCIAL STATEMENTS |
| | addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
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| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $516,000 and $366,861, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average
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daily net assets of the Fund at an annual rate of 0.60%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Board has approved a Shareholder Servicing Agreement for the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an
| NOTES TO THE FINANCIAL STATEMENTS |
equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 12,906,958 | |
| | Gross tax unrealized appreciation | | $ | 727,978 | |
| | Gross tax unrealized depreciation | | | (713,177 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 14,801 | |
| | Undistributed ordinary income | | $ | 7,523 | |
| | Undistributed long-term capital gains | | | 478,588 | |
| | Total distributable earnings | | $ | 486,111 | |
| | Other accumulated gain/(loss) | | $ | — | |
| | Total accumulated gain/(loss) | | $ | 500,912 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
| HENNESSY FUNDS | 1-800-966-4354 | |
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 106,614 | | | $ | 70,052 | |
| | Long-term capital gains | | | 478,198 | | | | 454,093 | |
| | Total distributions | | $ | 584,812 | | | $ | 524,145 | |
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| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| NOTES TO THE FINANCIAL STATEMENTS /EXPENSE EXAMPLE |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The example below includes, but is not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
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| Investor Class | | | |
| Actual | $1,000.00 | $1,009.60 | $18.09 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,032.00 | $18.29 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.80%, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 100.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 15.18%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
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| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
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| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
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| | (4) | A summary of the advisory agreement; |
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| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
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| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
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| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
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| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
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| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
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| | (3) | Whether economies of scale are recognized by the Fund; |
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| | (4) | The costs and profitability of the Fund to the Advisor; |
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| | (5) | The performance of the Fund; and |
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| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
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| | | | (ii) | seeks best execution for the Fund’s portfolio; |
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| | | | (iii) | manages the use of soft dollars for the Fund; and |
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| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
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| | | (c) | The Advisor monitors the liquidity of each Fund. |
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| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
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| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| | | | |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| | | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
(This Page Intentionally Left Blank.)
For information, questions, or assistance, please call
The Hennessy Funds
1-800-966-4354 or 1-415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY ENERGY TRANSITION FUND
Investor Class HNRGX
Institutional Class HNRIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 9 |
| Statement of Operations | | 10 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 26 |
| Board Approval of Investment Advisory Agreement | | 27 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Since Inception |
| | Months(1) | Year
| Years
| (12/31/13)
|
| Hennessy Energy Transition Fund – | | | | |
| Investor Class (HNRGX) | -8.68% | 5.83% | 3.19% | 2.70% |
| Hennessy Energy Transition Fund – | | | | |
| Institutional Class (HNRIX) | -8.53% | 6.20% | 3.49% | 2.96% |
S&P 500® Energy Index | -3.22% | 19.22% | 8.29% | 3.72% |
S&P 500® Index | 8.63% | 2.66% | 11.45% | 11.20% |
| Expense ratios: | Gross 2.42%, Net 2.25%(2) (Investor Class); |
| | Gross 2.09%, Net 1.92%(2) (Institutional Class) |
(1) | Periods of less than one year are not annualized. |
(2) | Certain service provider expenses will be voluntarily waived through July 31, 2025, at which time the arrangement will automatically terminate. In addition, the arrangement will not apply at any time the Fund’s net assets exceed $125 million. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com. Performance for periods including or prior to October 26, 2018, is that of the BP Capital TwinLine Energy Fund.
The S&P 500® Energy Index comprises those companies included in the S&P 500® that are classified in the Energy sector. The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Standard & Poor’s Financial Services is the source and owner of the S&P® and S&P 500® trademarks.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY ENERGY TRANSITION FUND
(% of Total Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % TOTAL ASSETS |
| Suncor Energy, Inc. | 5.74% |
| Canadian Natural Resources Ltd. | 5.72% |
| Exxon Mobil Corp. | 5.61% |
| Cheniere Energy, Inc. | 5.40% |
| Schlumberger NV | 5.28% |
| Pioneer Natural Resources Co. | 5.10% |
| EOG Resources, Inc. | 5.05% |
| TechnipFMC PLC | 4.71% |
| Halliburton Co. | 4.68% |
| Freeport-McMoRan, Inc. | 4.66% |
Note: The Fund concentrates its investments in the Energy industry. For presentation purposes, the Fund uses custom categories.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 96.35% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Downstream – 5.33% | | | | | | | | | |
| Marathon Petroleum Corp. | | | 1,500 | | | $ | 183,000 | | | | 0.97 | % |
| Phillips 66 | | | 4,000 | | | | 396,000 | | | | 2.09 | % |
| Valero Energy Corp. | | | 3,750 | | | | 430,013 | | | | 2.27 | % |
| | | | | | | | 1,009,013 | | | | 5.33 | % |
| | | | | | | | | | | | | |
| Exploration & Production – 48.11% | | | | | | | | | | | | |
| Antero Resources Corp. (a) | | | 33,900 | | | | 779,361 | | | | 4.12 | % |
| Canadian Natural Resources Ltd. (b) | | | 17,800 | | | | 1,085,266 | | | | 5.74 | % |
| Comstock Resources, Inc. | | | 40,000 | | | | 460,000 | | | | 2.43 | % |
| ConocoPhillips | | | 8,245 | | | | 848,328 | | | | 4.48 | % |
| Diamondback Energy, Inc. | | | 6,120 | | | | 870,264 | | | | 4.60 | % |
| EOG Resources, Inc. | | | 8,030 | | | | 959,344 | | | | 5.07 | % |
| EQT Corp. | | | 22,600 | | | | 787,384 | | | | 4.16 | % |
| Marathon Oil Corp. | | | 19,300 | | | | 466,288 | | | | 2.47 | % |
| PDC Energy, Inc. | | | 12,090 | | | | 786,454 | | | | 4.16 | % |
| Pioneer Natural Resources Co. | | | 4,450 | | | | 968,098 | | | | 5.12 | % |
| Suncor Energy, Inc. (b) | | | 34,760 | | | | 1,088,683 | | | | 5.76 | % |
| | | | | | | | 9,099,470 | | | | 48.11 | % |
| | | | | | | | | | | | | |
| Integrated – 8.80% | | | | | | | | | | | | |
| Chevron Corp. | | | 3,550 | | | | 598,459 | | | | 3.17 | % |
| Exxon Mobil Corp. | | | 9,000 | | | | 1,065,060 | | | | 5.63 | % |
| | | | | | | | 1,663,519 | | | | 8.80 | % |
| | | | | | | | | | | | | |
| Midstream – 5.42% | | | | | | | | | | | | |
| Cheniere Energy, Inc. | | | 6,700 | | | | 1,025,100 | | | | 5.42 | % |
| | | | | | | | | | | | | |
| Oil Services – 22.09% | | | | | | | | | | | | |
| Halliburton Co. | | | 27,150 | | | | 889,162 | | | | 4.70 | % |
| Schlumberger NV (b) | | | 20,310 | | | | 1,002,298 | | | | 5.30 | % |
| Solaris Oilfield Infrastructure, Inc. – Class A | | | 87,920 | | | | 675,226 | | | | 3.57 | % |
| TechnipFMC PLC (a)(b) | | | 65,240 | | | | 893,136 | | | | 4.72 | % |
| Tenaris SA – ADR (b) | | | 25,000 | | | | 717,750 | | | | 3.80 | % |
| | | | | | | | 4,177,572 | | | | 22.09 | % |
The accompanying notes are an integral part of these financial statements.
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Utility – 6.60% | | | | | | | | | |
| Freeport-McMoRan, Inc. | | | 23,320 | | | $ | 884,061 | | | | 4.67 | % |
| NextEra Energy, Inc. | | | 4,770 | | | | 365,525 | | | | 1.93 | % |
| | | | | | | | 1,249,586 | | | | 6.60 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $13,162,156) | | | | | | | 18,224,260 | | | | 96.35 | % |
| | | | | | | | | | | | | |
| PARTNERSHIPS & TRUSTS – 3.75% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Midstream – 3.75% | | | | | | | | | | | | |
| Plains All American Pipeline LP | | | 55,010 | | | | 709,629 | | | | 3.75 | % |
| | | | | | | | | | | | | |
| Total Partnerships & Trusts | | | | | | | | | | | | |
| (Cost $613,665) | | | | | | | 709,629 | | | | 3.75 | % |
| | | | | | | | | | | | | |
| SHORT-TERM INVESTMENTS– 0.00% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Money Market Funds – 0.00% | | | | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.73% (c) | | | 701 | | | | 701 | | | | 0.00 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $701) | | | | | | | 701 | | | | 0.00 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $13,776,522) – 101.10% | | | | | | | 18,934,590 | | | | 100.10 | % |
| Liabilities in Excess of Other Assets – (0.10)% | | | | | | | (20,139 | ) | | | (0.10 | )% |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 18,914,451 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
ADR – American Depositary Receipt
PLC – Public Limited Company
| (a) | Non-income-producing security. |
| (b) | U.S.-traded security of a foreign corporation. |
| (c) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Downstream | | $ | 1,009,013 | | | $ | — | | | $ | — | | | $ | 1,009,013 | |
| Exploration & Production | | | 9,099,470 | | | | — | | | | — | | | | 9,099,470 | |
| Integrated | | | 1,663,519 | | | | — | | | | — | | | | 1,663,519 | |
| Midstream | | | 1,025,100 | | | | — | | | | — | | | | 1,025,100 | |
| Oil Services | | | 4,177,572 | | | | — | | | | — | | | | 4,177,572 | |
| Utility | | | 1,249,586 | | | | — | | | | — | | | | 1,249,586 | |
| Total Common Stocks | | $ | 18,224,260 | | | $ | — | | | $ | — | | | $ | 18,224,260 | |
| Partnerships & Trusts | | | | | | | | | | | | | | | | |
| Midstream | | $ | 709,629 | | | $ | — | | | $ | — | | | $ | 709,629 | |
| Total Partnerships & Trusts | | $ | 709,629 | | | $ | — | | | $ | — | | | $ | 709,629 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 701 | | | $ | — | | | $ | — | | | $ | 701 | |
| Total Short-Term Investments | | $ | 701 | | | $ | — | | | $ | — | | | $ | 701 | |
| Total Investments | | $ | 18,934,590 | | | $ | — | | | $ | — | | | $ | 18,934,590 | |
The accompanying notes are an integral part of these financial statements.
| SCHEDULE OF INVESTMENTS/STATEMENT OF ASSETS AND LIABILITIES |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $13,776,522) | | $ | 18,934,590 | |
| Dividends and interest receivable | | | 4,298 | |
| Receivable for fund shares sold | | | 6,241 | |
| Return of capital receivable | | | 14,716 | |
| Prepaid expenses and other assets | | | 19,119 | |
| Total assets | | | 18,978,964 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable to custodian | | | 1,000 | |
| Payable for fund shares redeemed | | | 22,546 | |
| Payable to advisor | | | 19,968 | |
| Payable to auditor | | | 11,589 | |
| Accrued distribution fees | | | 1,556 | |
| Accrued service fees | | | 709 | |
| Accrued trustees fees | | | 4,776 | |
| Accrued expenses and other payables | | | 2,369 | |
| Total liabilities | | | 64,513 | |
| NET ASSETS | | $ | 18,914,451 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 53,636,782 | |
| Accumulated deficit | | | (34,722,331 | ) |
| Total net assets | | $ | 18,914,451 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 8,254,517 | |
| Shares issued and outstanding | | | 376,316 | |
| Net asset value, offering price, and redemption price per share | | $ | 21.94 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 10,659,934 | |
| Shares issued and outstanding | | | 477,651 | |
| Net asset value, offering price, and redemption price per share | | $ | 22.32 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
| Distributions received from master limited partnerships | | $ | 41,136 | |
| Return of capital on distributions received | | | (41,136 | ) |
Dividend income from common stock(1) | | | 347,006 | |
| Interest income | | | 4,701 | |
| Total investment income | | | 351,707 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 133,270 | |
| Federal and state registration fees | | | 16,606 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 9,723 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 6,706 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 15,944 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,584 | |
| Trustees' fees and expenses | | | 9,321 | |
| Distribution fees – Investor Class (See Note 5) | | | 7,266 | |
| Service fees – Investor Class (See Note 5) | | | 4,844 | |
| Reports to shareholders | | | 4,198 | |
| Interest expense (See Note 7) | | | 940 | |
| Legal fees | | | 172 | |
| Other expenses | | | 3,429 | |
| Total expenses before waiver | | | 235,847 | |
| Service provider expense waiver (See Note 5) | | | (15,944 | ) |
| Net expenses | | | 219,903 | |
| NET INVESTMENT INCOME | | $ | 131,804 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 1,331,619 | |
| Net change in unrealized appreciation/depreciation on investments | | | (3,510,069 | ) |
| Net loss on investments | | | (2,178,450 | ) |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | (2,046,646 | ) |
(1) | Net of foreign taxes withheld of $5,770. |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 131,804 | | | $ | 203,796 | |
| Net realized gain on investments | | | 1,331,619 | | | | 1,336,639 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | (3,510,069 | ) | | | 6,207,910 | |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | (2,046,646 | ) | | | 7,748,345 | |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (51,574 | ) | | | (751,147 | ) |
| Distributable earnings – Institutional Class | | | (87,195 | ) | | | (1,188,176 | ) |
| Total distributions | | | (138,769 | ) | | | (1,939,323 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 2,315,324 | | | | 8,234,369 | |
| Proceeds from shares subscribed – Institutional Class | | | 1,076,746 | | | | 6,681,659 | |
| Dividends reinvested – Investor Class | | | 47,756 | | | | 698,292 | |
| Dividends reinvested – Institutional Class | | | 86,765 | | | | 1,181,355 | |
| Cost of shares redeemed – Investor Class | | | (3,356,067 | ) | | | (7,622,351 | ) |
| Cost of shares redeemed – Institutional Class | | | (2,610,414 | ) | | | (7,693,364 | ) |
| Net increase (decrease) in net assets derived | | | | | | | | |
| from capital share transactions | | | (2,439,890 | ) | | | 1,479,960 | |
| TOTAL INCREASE (DECREASE) IN NET ASSETS | | | (4,625,305 | ) | | | 7,288,982 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 23,539,756 | | | | 16,250,774 | |
| End of period | | $ | 18,914,451 | | | $ | 23,539,756 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 98,415 | | | | 394,224 | |
| Shares sold – Institutional Class | | | 45,824 | | | | 331,064 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 2,122 | | | | 44,449 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 3,794 | | | | 74,066 | |
| Shares redeemed – Investor Class | | | (147,117 | ) | | | (387,313 | ) |
| Shares redeemed – Institutional Class | | | (113,847 | ) | | | (371,343 | ) |
| Net increase (decrease) in shares outstanding | | | (110,809 | ) | | | 85,147 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 24.15 | |
| | | | | |
| Income from investment operations: | | | | |
Net investment income (loss)(2) | | | 0.12 | |
| Net realized and unrealized gains (losses) on investments | | | (2.21 | ) |
| Total from investment operations | | | (2.09 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.12 | ) |
| Total distributions | | | (0.12 | ) |
| Net asset value, end of period | | $ | 21.94 | |
| | | | | |
| TOTAL RETURN | | | -8.68 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 8.25 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 2.40 | %(4) |
| After expense reimbursement | | | 2.25 | %(4)(6) |
| Ratio of net investment income (loss) to average net assets: | | | | |
| Before expense reimbursement | | | 0.90 | %(4) |
| After expense reimbursement | | | 1.05 | %(4) |
Portfolio turnover rate(7) | | | 18 | %(3) |
(1) | The period ended October 31, 2018, consists of 11 months due to the Fund’s fiscal year end change from November 30 to October 31, effective October 26, 2018. |
(2) | Calculated using the average shares outstanding method. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | The Fund had an expense limitation agreement in place through October 25, 2020. |
(6) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(7) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | | | Period Ended | | | Year Ended | |
| | | October 31, | | | November 30, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018(1) | | | 2017 | |
| | | | | | | | | | | | | | | | | |
| $ | 18.31 | | | $ | 8.74 | | | $ | 14.08 | | | $ | 18.32 | | | $ | 19.47 | | | $ | 20.54 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 0.16 | | | | 0.06 | | | | 0.04 | | | | (0.07 | ) | | | (0.20 | ) | | | (0.23 | ) |
| | 7.74 | | | | 9.51 | | | | (5.38 | ) | | | (4.17 | ) | | | (0.95 | ) | | | (0.84 | ) |
| | 7.90 | | | | 9.57 | | | | (5.34 | ) | | | (4.24 | ) | | | (1.15 | ) | | | (1.07 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (2.06 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| | (2.06 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| $ | 24.15 | | | $ | 18.31 | | | $ | 8.74 | | | $ | 14.08 | | | $ | 18.32 | | | $ | 19.47 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 49.24 | % | | | 109.50 | % | | | -37.93 | % | | | -23.14 | % | | | -5.91 | %(3) | | | -5.21 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 10.21 | | | $ | 6.80 | | | $ | 2.50 | | | $ | 6.83 | | | $ | 18.16 | | | $ | 22.66 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2.42 | % | | | 2.96 | % | | | 2.59 | % | | | 1.97 | % | | | 1.82 | %(4) | | | 1.87 | % |
| | 2.25 | %(6) | | | 2.74 | %(6) | | | 2.03 | %(5)(6) | | | 1.97 | % | | | 1.82 | %(4) | | | 1.87 | % |
| | | | | | | | | | | | | | | | �� | | | | | | | |
| | 0.64 | % | | | 0.16 | % | | | (0.18 | )% | | | (0.46 | )% | | | (1.05 | )%(4) | | | (1.21 | )% |
| | 0.81 | % | | | 0.38 | % | | | 0.38 | % | | | (0.46 | )% | | | (1.05 | )%(4) | | | (1.21 | )% |
| | 31 | % | | | 74 | % | | | 73 | % | | | 87 | % | | | 72 | %(3) | | | 84 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 24.59 | |
| | | | | |
| Income from investment operations: | | | | |
Net investment income (loss)(2) | | | 0.16 | |
| Net realized and unrealized gains (losses) on investments | | | (2.25 | ) |
| Total from investment operations | | | (2.09 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.18 | ) |
| Total distributions | | | (0.18 | ) |
| Net asset value, end of period | | $ | 22.32 | |
| | | | | |
| TOTAL RETURN | | | -8.53 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 10.66 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 2.06 | %(4) |
| After expense reimbursement | | | 1.91 | %(4)(6) |
| Ratio of net investment income (loss) to average net assets: | | | | |
| Before expense reimbursement | | | 1.24 | %(4) |
| After expense reimbursement | | | 1.39 | %(4) |
Portfolio turnover rate(7) | | | 18 | %(3) |
(1) | The period ended October 31, 2018, consists of 11 months due to the Fund’s fiscal year end change from November 30 to October 31, effective October 26, 2018. |
(2) | Calculated using the average shares outstanding method. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | The Fund had an expense limitation agreement in place through October 25, 2020. |
(6) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(7) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | | | Period Ended | | | Year Ended | |
| | | October 31, | | | November 30, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018(1) | | | 2017 | |
| | | | | | | | | | | | | | | | | |
| $ | 18.60 | | | $ | 8.85 | | | $ | 14.26 | | | $ | 18.50 | | | $ | 19.61 | | | $ | 20.64 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 0.23 | | | | 0.07 | | | | 0.12 | | | | (0.02 | ) | | | (0.15 | ) | | | (0.19 | ) |
| | 7.87 | | | | 9.68 | | | | (5.50 | ) | | | (4.22 | ) | | | (0.96 | ) | | | (0.84 | ) |
| | 8.10 | | | | 9.75 | | | | (5.38 | ) | | | (4.24 | ) | | | (1.11 | ) | | | (1.03 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (2.11 | ) | | | — | | | | (0.03 | ) | | | — | | | | — | | | | — | |
| | (2.11 | ) | | | — | | | | (0.03 | ) | | | — | | | | — | | | | — | |
| $ | 24.59 | | | $ | 18.60 | | | $ | 8.85 | | | $ | 14.26 | | | $ | 18.50 | | | $ | 19.61 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 49.71 | % | | | 110.17 | % | | | -37.80 | % | | | -22.92 | % | | | -5.66 | %(3) | | | -4.99 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 13.33 | | | $ | 9.45 | | | $ | 3.82 | | | $ | 44.37 | | | $ | 78.81 | | | $ | 122.45 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2.09 | % | | | 2.61 | % | | | 2.01 | % | | | 1.66 | % | | | 1.57 | %(4) | | | 1.62 | % |
| | 1.92 | %(6) | | | 2.39 | %(6) | | | 1.77 | %(5)(6) | | | 1.66 | % | | | 1.57 | %(4) | | | 1.62 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 0.96 | % | | | 0.22 | % | | | 0.79 | % | | | (0.12 | )% | | | (0.79 | )%(4) | | | (0.98 | )% |
| | 1.13 | % | | | 0.44 | % | | | 1.03 | % | | | (0.12 | )% | | | (0.79 | )%(4) | | | (0.98 | )% |
| | 31 | % | | | 74 | % | | | 73 | % | | | 87 | % | | | 72 | %(3) | | | 84 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Energy Transition Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is to seek total return. The Fund is a diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes and investments in companies organized as partnerships for tax purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. Distributions received from the Fund’s investments in master limited partnerships (“MLPs”) generally consist of ordinary income, capital gains, and return of capital. The Fund records investment income on the ex-date of the distributions. For financial statement purposes, the Fund uses return of capital and income estimates to allocate the dividend income received. Such estimates are based on historical information available from the MLPs and other industry sources. These estimates may subsequently be revised based on information received from the MLPs after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year end of the Fund. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Partnership Accounting Policy – To the extent the Fund receives distributions from underlying partnerships in which it invests, the Fund records its pro rata share of income/loss and capital gains/losses and accordingly adjusts the cost basis of the underlying partnerships for return of capital. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, MLPs, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the |
| NOTES TO THE FINANCIAL STATEMENTS |
| | securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading
| HENNESSY FUNDS | 1-800-966-4354 | |
volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $3,825,387 and $5,636,012, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 1.25 %. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
From October 26, 2018, through October 25, 2020, the Advisor contractually agreed to limit total annual operating expenses to 2.00% of the Fund’s net assets for Investor Class shares and 1.75% of the Fund’s net assets for Institutional Class shares (in each case, excluding all federal, state, and local taxes, interest, brokerage commissions, dividend and interest expenses on short sales, extraordinary items, and acquired fund fees and expenses and other costs incurred in connection with the purchase and sale of securities).
| NOTES TO THE FINANCIAL STATEMENTS |
For three years following the date on which expenses were waived or incurred, the Advisor may recoup waived or reimbursed expenses from the Fund if total operating expenses, including such recoupment, does not exceed the expense limitation in effect (i) at the time the Advisor waived or reimbursed such expenses and (ii) at the time the Advisor recoups such expenses. As of April 30, 2023, expenses subject to potential recovery were $18,875 for Investor Class shares and $33,244 for Institutional Class shares, both of which expire in fiscal year 2023. The Advisor did not recoup expenses from the Fund during the six months ended April 30, 2023.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations. Fund Services has voluntarily waived all or a portion of its fees for the Fund. The fees voluntarily waived by Fund Services during the six months ended April 30, 2023, are included in the Statement of Operations.
| HENNESSY FUNDS | 1-800-966-4354 | |
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $25,470 and 7.34%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included in the Statement of Operations. The maximum amount outstanding for the Fund during the period was $485,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 15,700,710 | |
| | Gross tax unrealized appreciation | | $ | 8,830,273 | |
| | Gross tax unrealized depreciation | | | (1,210,881 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 7,619,392 | |
| | Undistributed ordinary income | | $ | 138,769 | |
| | Undistributed long-term capital gains | | | — | |
| | Total distributable earnings | | $ | 138,769 | |
| | Other accumulated gain/(loss) | | $ | (40,295,077 | ) |
| | Total accumulated gain/(loss) | | $ | (32,536,916 | ) |
| NOTES TO THE FINANCIAL STATEMENTS |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales and partnership adjustments.
As of October 31, 2022, the Fund had $21,841,207 in unlimited long-term and $18,453,870 in unlimited short-term capital loss carryforwards. During fiscal year 2022, the capital losses utilized by the Fund were $1,338,948.
Capital losses sustained in or after fiscal year 2012 can be carried forward indefinitely, but any such loss retains the character of the original loss and must be utilized prior to any loss incurred before fiscal year 2012. As a result of this ordering rule, capital loss carryforwards incurred prior to fiscal year 2012 may be more likely to expire unused. Capital losses sustained prior to fiscal year 2012 can be carried forward for eight years and can be carried forward as short-term capital losses regardless of the character of the original loss.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 138,769 | | | $ | 1,939,323 | |
| | Long-term capital gains | | | — | | | | — | |
| | Total distributions | | $ | 138,769 | | | $ | 1,939,323 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $ 913.20 | $21.52 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,027.50 | $22.81 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $ 914.70 | $18.29 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,030.90 | $19.40 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 2.25% for Investor Class shares or 1.91% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
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How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 15.91%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 9.09%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | A summary of the advisory agreement; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (4) | The costs and profitability of the Fund to the Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| | | | | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; |
| | | | | |
| | | | (iii) | manages the use of soft dollars for the Fund; and |
| | | | | |
| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
(This Page Intentionally Left Blank.)
For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY MIDSTREAM FUND
Investor Class HMSFX
Institutional Class HMSIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 8 |
| Statement of Operations | | 9 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 26 |
| Proxy Voting Policy and Proxy Voting Records | | 28 |
| Availability of Quarterly Portfolio Schedule | | 28 |
| Important Notice Regarding Delivery of Shareholder Documents | | 28 |
| Electronic Delivery | | 28 |
| Board Approval of Investment Advisory Agreement | | 29 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Since Inception |
| | Months(1) | Year
| Years
| (12/31/13)
|
| Hennessy Midstream Fund – | | | | |
| Investor Class (HMSFX) | 2.79% | 11.33% | 3.89% | 0.27% |
| Hennessy Midstream Fund – | | | | |
| Institutional Class (HMSIX) | 2.91% | 11.63% | 4.14% | 0.53% |
| Alerian US Midstream Energy Index | 0.78% | 9.18% | 9.26% | 3.39% |
S&P 500® Index | 8.63% | 2.66% | 11.45% | 11.20% |
| Expense ratios: | Gross 2.05%, Net 1.76%(2)(3) (Investor Class); |
| | Gross 1.69%, Net 1.51%(2)(3) (Institutional Class) |
(1) | Periods of less than one year are not annualized. |
(2) | The Fund’s investment advisor has contractually agreed to limit expenses until February 28, 2024. |
(3) | Certain service provider expenses will be voluntarily waived through July 31, 2025, at which time the arrangement will automatically terminate. In addition, the arrangement will not apply at any time the Fund’s net assets exceed $125 million. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com. Performance for periods including or prior to October 26, 2018, is that of the BP Capital TwinLine MLP Fund.
The Alerian US Midstream Energy Index comprises companies that earn a majority of their cash flows from midstream activities involving energy commodities. The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
The Alerian US Midstream Energy Index is a servicemark of GKD Index Partners, LLC d/b/a Alerian (“Alerian”), and its use is granted under a license from Alerian. Alerian makes no express or implied warranties, representations, or promises regarding the originality, merchantability, suitability, or fitness for a particular purpose or use with respect to the Alerian indices. No party may rely on, and Alerian does not accept any liability for any errors, omissions, interruptions, or defects in, the Alerian indices or underlying data. In no event shall Alerian have any liability for any direct, indirect, special, incidental, punitive, consequential, or other damages (including lost profits), even if notified of the possibility of such damages.
Standard & Poor’s Financial Services is the source and owner of the S&P® and S&P 500® trademarks.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY MIDSTREAM FUND
(% of Total Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % TOTAL ASSETS |
| Energy Transfer LP | 14.61% |
| Enterprise Products Partners LP | 11.85% |
| Plains All American Pipeline LP | 10.42% |
| MPLX LP | 9.68% |
| Antero Midstream Corp. | 8.00% |
| Targa Resources Corp. | 7.63% |
| Magellan Midstream Partners LP | 7.07% |
| The Williams Companies, Inc. | 6.91% |
| Western Midstream Partners LP | 5.78% |
| ONEOK, Inc. | 4.83% |
Note: The Fund concentrates its investments in the Energy industry. For presentation purposes, the Fund uses custom categories.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 38.46% | | Number of | | | | | | % of | |
| | | Shares | | | Value | | | Net Assets | |
| Gathering & Processing – 21.03% | | | | | | | | | |
| Antero Midstream Corp. | | | 346,600 | | | $ | 3,729,416 | | | | 8.02 | % |
| EnLink Midstream LLC | | | 109,000 | | | | 1,069,290 | | | | 2.30 | % |
| Equitrans Midstream Corp. | | | 276,500 | | | | 1,423,975 | | | | 3.06 | % |
| Targa Resources Corp. | | | 47,100 | | | | 3,557,463 | | | | 7.65 | % |
| | | | | | | | 9,780,144 | | | | 21.03 | % |
| | | | | | | | | | | | | |
| Natural Gas/NGL Transportation – 17.43% | | | | | | | | | | | | |
| DT Midstream, Inc. | | | 19,800 | | | | 975,546 | | | | 2.10 | % |
| Kinder Morgan, Inc. | | | 96,790 | | | | 1,659,948 | | | | 3.57 | % |
| ONEOK, Inc. | | | 34,426 | | | | 2,251,805 | | | | 4.84 | % |
| The Williams Companies, Inc. | | | 106,452 | | | | 3,221,238 | | | | 6.92 | % |
| | | | | | | | 8,108,537 | | | | 17.43 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $12,049,340) | | | | | | | 17,888,681 | | | | 38.46 | % |
| | | | | | | | | | | | | |
| PARTNERSHIPS & TRUSTS – 59.56% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Crude Oil & Refined Products – 27.24% | | | | | | | | | | | | |
| Magellan Midstream Partners LP | | | 59,100 | | | | 3,297,780 | | | | 7.09 | % |
| MPLX LP | | | 128,949 | | | | 4,511,926 | | | | 9.70 | % |
| Plains All American Pipeline LP | | | 376,526 | | | | 4,857,185 | | | | 10.45 | % |
| | | | | | | | 12,666,891 | | | | 27.24 | % |
| | | | | | | | | | | | | |
| Gathering & Processing – 5.79% | | | | | | | | | | | | |
| Western Midstream Partners LP | | | 101,800 | | | | 2,694,646 | | | | 5.79 | % |
| | | | | | | | | | | | | |
| Natural Gas/NGL Transportation – 26.53% | | | | | | | | | | | | |
| Energy Transfer LP | | | 528,900 | | | | 6,812,232 | | | | 14.65 | % |
| Enterprise Products Partners LP | | | 210,000 | | | | 5,525,100 | | | | 11.88 | % |
| | | | | | | | 12,337,332 | | | | 26.53 | % |
| | | | | | | | | | | | | |
| Total Partnerships & Trusts | | | | | | | | | | | | |
| (Cost $16,668,280) | | | | | | | 27,698,869 | | | | 59.56 | % |
The accompanying notes are an integral part of these financial statements.
| SHORT-TERM INVESTMENTS – 1.17% | | Number of | | | | | | % of | |
| | | Shares | | | Value | | | Net Assets | |
| Money Market Funds – 1.17% | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | |
| Institutional Class, 4.73% (a) | | | 545,159 | | | $ | 545,159 | | | | 1.17 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $545,159) | | | | | | | 545,159 | | | | 1.17 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $29,262,779) – 99.19% | | | | | | | 46,132,709 | | | | 99.19 | % |
| Other Assets in Excess of Liabilities – 0.81% | | | | | | | 378,108 | | | | 0.81 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 46,510,817 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
| (a) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Gathering & Processing | | $ | 9,780,144 | | | $ | — | | | $ | — | | | $ | 9,780,144 | |
| Natural Gas/NGL Transportation | | | 8,108,537 | | | | — | | | | — | | | | 8,108,537 | |
| Total Common Stocks | | $ | 17,888,681 | | | $ | — | | | $ | — | | | $ | 17,888,681 | |
| Partnerships & Trusts | | | | | | | | | | | | | | | | |
| Crude Oil & Refined Products | | $ | 12,666,891 | | | | — | | | | — | | | $ | 12,666,891 | |
| Gathering & Processing | | | 2,694,646 | | | | — | | | | — | | | | 2,694,646 | |
| Natural Gas/NGL Transportation | | | 12,337,332 | | | | — | | | | — | | | | 12,337,332 | |
| Total Partnerships & Trusts | | $ | 27,698,869 | | | $ | — | | | $ | — | | | $ | 27,698,869 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 545,159 | | | $ | — | | | $ | — | | | $ | 545,159 | |
| Total Short-Term Investments | | $ | 545,159 | | | $ | — | | | $ | — | | | $ | 545,159 | |
| Total Investments | | $ | 46,132,709 | | | $ | — | | | $ | — | | | $ | 46,132,709 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $29,262,779) | | $ | 46,132,709 | |
| Dividends and interest receivable | | | 76,718 | |
| Receivable for fund shares sold | | | 6,727 | |
| Return of capital receivable | | | 392,327 | |
| Deferred income tax | | | — | |
| Prepaid expenses and other assets | | | 21,890 | |
| Total assets | | | 46,630,371 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for fund shares redeemed | | | 46,430 | |
| Payable to advisor | | | 39,775 | |
| Payable to auditor | | | 20,454 | |
| Accrued distribution fees | | | 1,585 | |
| Accrued service fees | | | 1,034 | |
| Accrued trustees fees | | | 4,801 | |
| Accrued expenses and other payables | | | 5,475 | |
| Total liabilities | | | 119,554 | |
| NET ASSETS | | $ | 46,510,817 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 54,738,786 | |
| Accumulated deficit | | | (8,227,969 | ) |
| Total net assets | | $ | 46,510,817 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 12,763,833 | |
| Shares issued and outstanding | | | 1,367,909 | |
| Net asset value, offering price, and redemption price per share | | $ | 9.33 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 33,746,984 | |
| Shares issued and outstanding | | | 3,487,077 | |
| Net asset value, offering price, and redemption price per share | | $ | 9.68 | |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF ASSETS AND LIABILITIES/STATEMENT OF OPERATIONS |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
| Distributions received from master limited partnerships | | $ | 1,121,895 | |
| Return of capital on distributions received | | | (1,121,895 | ) |
| Dividend income | | | 336,406 | |
| Interest income | | | 11,811 | |
| Total investment income | | | 348,217 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 245,067 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 14,239 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 14,692 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 26,531 | |
| Audit fees | | | 20,453 | |
| Federal and state registration fees | | | 18,234 | |
| Franchise tax expense | | | 12,000 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Trustees’ fees and expenses | | | 9,507 | |
| Distribution fees – Investor Class (See Note 5) | | | 8,932 | |
| Service fees – Investor Class (See Note 5) | | | 5,954 | |
| Reports to shareholders | | | 5,652 | |
| Income tax expense | | | 900 | |
| Interest expense (See Note 7) | | | 511 | |
| Legal fees | | | 458 | |
| Other expenses | | | 6,521 | |
| Total expenses before waivers and reimbursements | | | 401,495 | |
| Service provider expense waiver (See Note 5) | | | (26,531 | ) |
| Expense reimbursement by advisor – Investor Class (See Note 5) | | | (9,900 | ) |
| Expense reimbursement by advisor – Institutional Class (See Note 5) | | | (2,585 | ) |
| Net expenses | | | 362,479 | |
| NET INVESTMENT LOSS | | $ | (14,262 | ) |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 920,842 | |
| Net change in unrealized appreciation/depreciation on investments | | | 343,691 | |
| Income tax expense | | | — | |
| Net gain on investments | | | 1,264,533 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 1,250,271 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
| STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment loss | | $ | (14,262 | ) | | $ | (246,112 | ) |
| Net realized gain on investments | | | 920,842 | | | | 2,241,454 | |
| Net change in unrealized | | | | | | | | |
| appreciation/deprecation on investments | | | 343,691 | | | | 6,041,810 | |
| Net increase in net assets resulting from operations | | | 1,250,271 | | | | 8,037,152 | |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS FROM: | | | | | | | | |
| Distributable earnings – Investor Class | | | (564,187 | ) | | | (56,001 | ) |
| Return of capital – Investor Class | | | (84,304 | ) | | | (932,728 | ) |
| Distributable earnings – Institutional Class | | | (1,507,894 | ) | | | (205,718 | ) |
| Return of capital – Institutional Class | | | (225,317 | ) | | | (3,426,419 | ) |
| Total distributions | | | (2,381,702 | ) | | | (4,620,866 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 2,593,652 | | | | 5,720,090 | |
| Proceeds from shares subscribed – Institutional Class | | | 3,083,596 | | | | 11,963,118 | |
| Dividends reinvested – Investor Class | | | 478,636 | | | | 840,503 | |
| Dividends reinvested – Institutional Class | | | 1,621,701 | | | | 3,393,598 | |
| Cost of shares redeemed – Investor Class | | | (1,470,402 | ) | | | (2,598,309 | ) |
| Cost of shares redeemed – Institutional Class | | | (3,199,128 | ) | | | (15,368,206 | ) |
| Net increase in net assets derived | | | | | | | | |
| from capital share transactions | | | 3,108,055 | | | | 3,950,794 | |
| TOTAL INCREASE IN NET ASSETS | | | 1,976,624 | | | | 7,367,080 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 44,534,193 | | | | 37,167,113 | |
| End of period | | $ | 46,510,817 | | | $ | 44,534,193 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 276,174 | | | | 634,991 | |
| Shares sold – Institutional Class | | | 316,882 | | | | 1,295,385 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 50,789 | | | | 93,668 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 166,334 | | | | 369,848 | |
| Shares redeemed – Investor Class | | | (156,577 | ) | | | (307,053 | ) |
| Shares redeemed – Institutional Class | | | (333,627 | ) | | | (1,747,350 | ) |
| Net increase in shares outstanding | | | 319,975 | | | | 339,489 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 9.58 | |
| | | | | |
| Income from investment operations: | | | | |
Net investment loss(2)(3) | | | (0.01 | ) |
| Net realized and unrealized gains (losses) on investments | | | 0.28 | |
| Total from investment operations | | | 0.27 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.45 | ) |
| Dividends from return of capital | | | (0.07 | ) |
| Total distributions | | | (0.52 | ) |
| Net asset value, end of period | | $ | 9.33 | |
| | | | | |
| TOTAL RETURN | | | 2.79 | %(4) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 12.76 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 2.09 | %(5) |
| After expense reimbursement | | | 1.81 | %(5)(6) |
| Ratio of net investment loss to average net assets: | | | | |
Before expense reimbursement(3) | | | (0.53 | )%(5) |
After expense reimbursement(3) | | | (0.25 | )%(5) |
Portfolio turnover rate(7) | | | 5 | %(4) |
(1) | The period ended October 31, 2018, consists of 11 months due to the Fund’s fiscal year end change from November 30 to October 31, effective October 26, 2018. |
(2) | Calculated using the average shares outstanding method. |
(3) | Includes current and deferred tax benefit/expense from net investment income/loss only. |
(4) | Not annualized. |
(5) | Annualized. |
(6) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(7) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | | | Period Ended | | | Year Ended | |
| | | October 31, | | | November 30, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018(1) | | | 2017 | |
| | | | | | | | | | | | | | | | | |
| $ | 8.66 | | | $ | 5.55 | | | $ | 10.90 | | | $ | 12.66 | | | $ | 14.51 | | | $ | 16.54 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (0.07 | ) | | | (0.07 | ) | | | (0.10 | ) | | | (0.10 | ) | | | (0.16 | ) | | | (0.22 | ) |
| | 2.02 | | | | 4.21 | | | | (4.22 | ) | | | (0.63 | ) | | | (0.66 | ) | | | (0.78 | ) |
| | 1.95 | | | | 4.14 | | | | (4.32 | ) | | | (0.73 | ) | | | (0.82 | ) | | | (1.00 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (0.06 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| | (0.97 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) |
| | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) |
| $ | 9.58 | | | $ | 8.66 | | | $ | 5.55 | | | $ | 10.90 | | | $ | 12.66 | | | $ | 14.51 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 24.03 | % | | | 78.41 | % | | | -42.13 | % | | | -6.28 | % | | | -6.15 | %(4) | | | -6.49 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 11.47 | | | $ | 6.72 | | | $ | 3.81 | | | $ | 9.20 | | | $ | 20.07 | | | $ | 16.86 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2.05 | % | | | 2.11 | % | | | 2.12 | % | | | 1.89 | % | | | 1.86 | %(5) | | | 1.91 | % |
| | 1.76 | %(6) | | | 1.76 | %(6) | | | 1.76 | %(6) | | | 1.76 | % | | | 1.78 | %(5) | | | 1.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (1.08 | )% | | | (1.26 | )% | | | (1.63 | )% | | | (0.92 | )% | | | (1.34 | )%(5) | | | (1.50 | )% |
| | (0.79 | )% | | | (0.91 | )% | | | (1.27 | )% | | | (0.79 | )% | | | (1.26 | )%(5) | | | (1.36 | )% |
| | 33 | % | | | 40 | % | | | 53 | % | | | 41 | % | | | 64 | %(4) | | | 63 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 9.91 | |
| | | | | |
| Income from investment operations: | | | | |
Net investment income (loss)(2)(3) | | | 0.00 | (4) |
| Net realized and unrealized gains (losses) on investments | | | 0.29 | |
| Total from investment operations | | | 0.29 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.45 | ) |
| Dividends from return of capital | | | (0.07 | ) |
| Total distributions | | | (0.52 | ) |
| Net asset value, end of period | | $ | 9.68 | |
| | | | | |
| TOTAL RETURN | | | 2.91 | %(5) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 33.75 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 1.69 | %(6) |
| After expense reimbursement | | | 1.56 | %(6)(7) |
| Ratio of net investment loss to average net assets: | | | | |
Before expense reimbursement(3) | | | (0.13 | )%(6) |
After expense reimbursement(3) | | | 0.00 | %(4)(6) |
Portfolio turnover rate(8) | | | 5 | %(5) |
(1) | The period ended October 31, 2018, consists of 11 months due to the Fund’s fiscal year end change from November 30 to October 31, effective October 26, 2018. |
(2) | Calculated using the average shares outstanding method. |
(3) | Includes current and deferred tax benefit/expense from net investment income/loss only. |
(4) | Amount is between $(0.005) and $0.005. |
(5) | Not annualized. |
(6) | Annualized. |
(7) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(8) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | | | Period Ended | | | Year Ended | |
| | | October 31, | | | November 30, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018(1) | | | 2017 | |
| | | | | | | | | | | | | | | | | |
| $ | 8.90 | | | $ | 5.68 | | | $ | 11.09 | | | $ | 12.83 | | | $ | 14.66 | | | $ | 16.66 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (0.05 | ) | | | (0.05 | ) | | | (0.10 | ) | | | (0.09 | ) | | | (0.14 | ) | | | (0.18 | ) |
| | 2.09 | | | | 4.30 | | | | (4.28 | ) | | | (0.62 | ) | | | (0.66 | ) | | | (0.79 | ) |
| | 2.04 | | | | 4.25 | | | | (4.38 | ) | | | (0.71 | ) | | | (0.80 | ) | | | (0.97 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (0.06 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| | (0.97 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) |
| | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) | | | (1.03 | ) |
| $ | 9.91 | | | $ | 8.90 | | | $ | 5.68 | | | $ | 11.09 | | | $ | 12.83 | | | $ | 14.66 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 24.41 | % | | | 78.57 | % | | | -41.93 | % | | | -6.10 | % | | | -5.94 | %(5) | | | -6.25 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 33.06 | | | $ | 30.45 | | | $ | 18.33 | | | $ | 31.78 | | | $ | 61.92 | | | $ | 82.59 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 1.69 | % | | | 1.74 | % | | | 1.79 | % | | | 1.56 | % | | | 1.58 | %(6) | | | 1.66 | % |
| | 1.51 | %(7) | | | 1.51 | %(7) | | | 1.51 | %(7) | | | 1.51 | % | | | 1.52 | %(6) | | | 1.52 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | (0.71 | )% | | | (0.89 | )% | | | (1.55 | )% | | | (0.76 | )% | | | (1.15 | )%(6) | | | (1.28 | )% |
| | (0.53 | )% | | | (0.66 | )% | | | (1.27 | )% | | | (0.71 | )% | | | (1.09 | )%(6) | | | (1.14 | )% |
| | 33 | % | | | 40 | % | | | 53 | % | | | 41 | % | | | 64 | %(5) | | | 63 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Midstream Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is to seek capital appreciation through distribution growth along with current income. The Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes. Because the Fund is treated as a “C” corporation, it is not taxed as a regulated investment company under Subchapter M of the Code and is not required to comply with the diversification requirements applicable to regulated investment companies. The Fund is a non-diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund is taxed as a corporation and is obligated to pay U.S. federal and state income tax on its taxable income. Currently, the maximum marginal regular federal income tax rate for a corporation is 21%. The Fund invests a substantial portion of its assets in master limited partnerships (“MLPs”), which are treated as partnerships for federal income tax purposes. As a limited partner in MLPs, the Fund reports its allocable share of each MLP’s taxable income in computing its own taxable income. |
| | |
| | The Fund includes any tax expense or benefit in the Statement of Operations based on the component of income or gains/losses to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the carrying amount of assets and liabilities for income tax purposes. The Fund recognizes a valuation allowance if, based on the weight of available evidence, it is more likely than not that the Fund will not realize some portion or all of the deferred income tax assets. As of April 30, 2023, the Fund has placed a full valuation allowance on its deferred tax assets. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be |
| NOTES TO THE FINANCIAL STATEMENTS |
| | taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund files U.S. federal income tax returns and various state income tax returns. |
| | |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. Distributions received from the Fund’s investments in MLPs generally consist of ordinary income, capital gains, and return of capital. The Fund records investment income on the ex-date of the distributions. For financial statement purposes, the Fund uses return of capital and income estimates to allocate the dividend income received. Such estimates are based on historical information available from the MLPs and other industry sources. These estimates may subsequently be revised based on information received from the MLPs after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year end of the Fund. |
| | |
| e). | Distributions to Shareholders – The Fund typically makes cash distributions to its shareholders quarterly at the beginning of the months of March, June, September, and December. Due to the tax treatment of the Fund’s allocations and distributions from MLPs, a significant portion of the Fund’s distributions to shareholders typically is treated as return of capital to shareholders for U.S. federal income tax purposes (i.e., as distributions in excess of the Fund’s current and accumulated earnings and profits as described below). However, no assurance can be given in this regard; just as the Fund’s corporate income tax liability can fluctuate materially from year to year, the extent to which the Fund is able to make return-of-capital distributions also can vary materially from year to year depending on a number of different factors, including the composition of the Fund’s portfolio, the level of allocations of net income and other tax items for the Fund from its underlying MLP investments, the length of time the Fund has owned the MLP equity securities in its portfolio, and the extent to which the Fund disposes of MLP equity securities during a particular year, including to meet Fund shareholder redemption requests as necessary. |
| | |
| | In general, a distribution constitutes a return of capital to a shareholder rather than a dividend to the extent such distribution exceeds the Fund’s current and accumulated earnings and profits. The portion of any distribution treated as a return of capital constitutes a tax-free return of capital to the extent of a shareholder’s cost basis in Fund shares and thereafter generally is taxable to the shareholder as a capital gain. A return-of-capital distribution also reduces the shareholder’s cost basis in Fund shares (but not below zero). A lower cost basis means that a shareholder recognizes more gain or less loss when the shareholder eventually sells Fund shares, which increases the shareholder’s tax liability. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | The Fund attempts to maintain a stable distribution rate and therefore may distribute more or less than the actual amount of cash it receives from its investments in a particular period. Any undistributed cash would be available to supplement future distributions, and until distributed would increase the Fund’s net asset value (“NAV”). Correspondingly, such amounts, once distributed, decrease the Fund’s NAV. In addition, the Fund may opt not to make distributions in quarters in which the Fund believes that a distribution could cause adverse tax consequences to shareholders, including when the Fund believes that a distribution may not constitute a tax-free return of capital as described above. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The NAV per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Partnership Accounting Policy – To the extent the Fund receives distributions from underlying partnerships in which it invests, the Fund records its pro rata share of income/loss and capital gains/losses and accordingly adjusts the cost basis of the underlying partnerships for return of capital. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. |
| NOTES TO THE FINANCIAL STATEMENTS |
| | Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, MLPs, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing
| NOTES TO THE FINANCIAL STATEMENTS |
means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $4,094,573 and $2,238,483, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 1.10%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Advisor has contractually agreed to limit total annual operating expenses to 1.75% of the Fund’s net assets for Investor Class shares and 1.50% of the Fund’s net assets for Institutional Class shares (in each case, excluding all federal, state, and local taxes, interest, brokerage commissions, dividend and interest expenses on short sales, extraordinary items, and acquired fund fees and expenses and other costs incurred in connection with the purchase and sale of securities) through February 28, 2024.
For three years following the date on which expenses were waived or incurred, the Advisor may recoup waived or reimbursed expenses from the Fund if total operating expenses, including such recoupment, does not exceed the expense limitation in effect (i) at the time the Advisor waived or reimbursed such expenses and (ii) at the time the Advisor recoups such expenses. As of April 30, 2023, expenses subject to potential recovery for Investor Class and Institutional Class shares and the fiscal years in which they expire were as follows:
| | | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | |
| | | 2023
| 2024
| 2025
| 2026
| Total
|
| | Investor Class | $11,832 | $12,376 | $13,391 | $9,900 | $47,499 |
| | Institutional Class | $28,522 | $26,693 | $11,840 | $2,585 | $69,640 |
The Advisor did not recoup expenses from the Fund during the six months ended April 30, 2023.
| HENNESSY FUNDS | 1-800-966-4354 | |
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations. Fund Services has voluntarily waived all or a portion of its fees for the Fund. The fees voluntarily waived by Fund Services during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an
| NOTES TO THE FINANCIAL STATEMENTS |
equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $13,541 and 7.50%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included in the Statement of Operations. The maximum amount outstanding for the Fund during the period was $371,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of April 30, 2023, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 25,731,083 | |
| | Gross tax unrealized appreciation | | $ | 21,196,145 | |
| | Gross tax unrealized depreciation | | | (794,519 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 20,401,626 | |
As of April 30, 2023, deferred tax assets consisted of the following:
| | Deferred tax assets (liabilities): | | | |
| | Net operating losses | | $ | 597,532 | |
| | Capital loss | | | 4,328,080 | |
| | Unrealized (gain) loss on investments | | | (3,214,233 | ) |
| | Total deferred tax assets, net | | | 1,711,379 | |
| | Valuation allowance | | | (1,711,379 | ) |
| | Net | | $ | — | |
For the six months ended April 30, 2023, the Fund had an effective tax rate of 0% and a federal statutory rate of 21%, with the difference resulting from a change in the balances of the deferred tax assets and liability and the related valuation allowance applied against the deferred tax assets and liability.
| HENNESSY FUNDS | 1-800-966-4354 | |
Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Fund has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined that, based on net losses to date, it may not utilize all of its deferred tax assets in the future. As of April 30, 2023, the Fund established a valuation allowance in the amount of $1,711,379 against its net deferred tax assets.
The Fund may carry forward any net capital loss five years to offset any future realized capital gains. The Fund may carry forward indefinitely any net operating loss arising in a tax year ending after December 31, 2018. As of April 30, 2023, the Fund had $19,409,129 in capital loss carryforwards that expire as follows:
| | Amount
| Expiration
| |
| | $3,258,843 | 10/31/2023 | |
| | 8,971,423 | 10/31/2024 | |
| | 7,178,863 | 10/31/2025 | |
As of April 30, 2023, the Fund had $2,682,991 in net operating loss carryforwards that expire as follows:
| | Amount
| Expiration
| |
| | $2,682,991 | Indefinite | |
Total income taxes have been computed by applying the federal statutory income tax rate of 21% plus a blended state income tax rate. The Fund applied this effective rate to net investment income and realized and unrealized gains on investments before taxes in computing its total income taxes.
| | Tax expense (benefit) at statutory rates | | $ | 262,557 | |
| | State income tax expense, net of federal benefit | | | 14,089 | |
| | Tax expense (benefit) on permanent items(1) | | | (23,846 | ) |
| | Tax expense (benefit) due to change in effective state rates | | | — | |
| | Total current tax expense (benefit) | | | — | |
| | Change in valuation allowance | | | (252,800 | ) |
| | Total tax expense | | $ | — | |
| | | | | | |
| | (1) Permanent items consist of dividends-received deductions. | | | | |
The Fund recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions in all open tax years and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on U.S. federal tax returns and state tax returns filed or expected to be filed. No income tax returns are currently under examination. Generally, the tax returns of the Fund for the prior three fiscal years are open for examination. Due to the nature of the Fund’s investments, the Fund may be required to file income tax returns in several states. The Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially.
| NOTES TO THE FINANCIAL STATEMENTS |
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 2,072,081 | | | $ | 261,719 | |
| | Long-term capital gains | | | — | | | | — | |
| | Return of capital | | | 309,621 | | | | 4,359,147 | |
| | Total distributions | | $ | 2,381,702 | | | $ | 4,620,866 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Other than as disclosed below, management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
On June 1, 2023, distributions were declared and paid to shareholders of record on May 31, 2023, as follows:
| | | Return of Capital | |
| | Investor Class | $0.2575 | |
| | Institutional Class | $0.2575 | |
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,027.90 | $18.35 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,031.90 | $18.39 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,029.10 | $15.83 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,034.40 | $15.87 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.81% for Investor Class shares or 1.56% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | A summary of the advisory agreement; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (4) | The costs and profitability of the Fund to the Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| | | | | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; |
| | | | | |
| | | | (iii) | manages the use of soft dollars for the Fund; and |
| | | | | |
| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
(This Page Intentionally Left Blank.)
For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY GAS UTILITY FUND
Investor Class GASFX
Institutional Class HGASX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 9 |
| Statement of Operations | | 10 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 26 |
| Board Approval of Investment Advisory Agreement | | 27 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Gas Utility Fund – | | | | |
| Investor Class (GASFX) | 3.02% | -2.70% | 7.20% | 6.55% |
| Hennessy Gas Utility Fund – | | | | |
Institutional Class (HGASX)(2) | 3.17% | -2.35% | 7.54% | 6.77% |
| AGA Stock Index | 3.57% | -1.67% | 8.40% | 7.72% |
S&P 500® Index | 8.63% | 2.66% | 11.45% | 12.20% |
Expense ratios: 1.00% (Investor Class); 0.68% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
(2) | The inception date of Institutional Class shares is March 1, 2017. Performance shown prior to the inception of Institutional Class shares reflects the performance of Investor Class shares and includes expenses that are not applicable to, and are higher than, those of Institutional Class shares. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The AGA Stock Index is a capitalization-weighted index that consists of members of the American Gas Association whose securities are traded on a U.S. stock exchange. The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Standard & Poor’s Financial Services is the source and owner of the S&P® and S&P 500® trademarks.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY GAS UTILITY FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Berkshire Hathaway, Inc., Class A | 5.25% |
| TC Energy Corp. | 5.10% |
| Sempra Energy | 5.02% |
| The Southern Co. | 5.01% |
| Enbridge, Inc. | 4.99% |
| Atmos Energy Corp. | 4.94% |
| Cheniere Energy, Inc. | 4.72% |
| Kinder Morgan, Inc. | 4.71% |
| ONEOK, Inc. | 4.30% |
| EQT Corp. | 4.19% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 99.38% | | Number of | | | | | | % of | |
| | | Shares | | | Value | | | Net Assets | |
| Energy – 29.70% | | | | | | | | | |
| Cheniere Energy, Inc. | | | 156,617 | | | $ | 23,962,401 | | | | 4.72 | % |
| DT Midstream, Inc. | | | 155,200 | | | | 7,646,704 | | | | 1.51 | % |
| Enbridge, Inc. (a) | | | 637,765 | | | | 25,357,536 | | | | 4.99 | % |
| EQT Corp. | | | 610,700 | | | | 21,276,788 | | | | 4.19 | % |
| Kinder Morgan, Inc. | | | 1,396,801 | | | | 23,955,137 | | | | 4.71 | % |
| ONEOK, Inc. | | | 333,900 | | | | 21,840,399 | | | | 4.30 | % |
| TC Energy Corp. (a) | | | 624,100 | | | | 25,925,114 | | | | 5.10 | % |
| Tellurian, Inc. (b) | | | 658,190 | | | | 934,630 | | | | 0.18 | % |
| | | | | | | | 150,898,709 | | | | 29.70 | % |
| | | | | | | | | | | | | |
| Financials – 5.25% | | | | | | | | | | | | |
| Berkshire Hathaway, Inc., Class A (b) | | | 53 | | | | 26,652,639 | | | | 5.25 | % |
| | | | | | | | | | | | | |
| Industrials – 0.89% | | | | | | | | | | | | |
| MDU Resources Group, Inc. | | | 155,607 | | | | 4,546,837 | | | | 0.89 | % |
| | | | | | | | | | | | | |
| Utilities – 63.54% | | | | | | | | | | | | |
| Algonquin Power & Utilities Corp. (a) | | | 111,064 | | | | 946,265 | | | | 0.19 | % |
| ALLETE, Inc. | | | 375 | | | | 23,392 | | | | 0.00 | % |
| Alliant Energy Corp. | | | 34,900 | | | | 1,924,386 | | | | 0.38 | % |
| Ameren Corp. | | | 45,840 | | | | 4,078,385 | | | | 0.80 | % |
| Atmos Energy Corp. | | | 219,786 | | | | 25,086,374 | | | | 4.94 | % |
| Avangrid, Inc. | | | 93,200 | | | | 3,752,232 | | | | 0.74 | % |
| Avista Corp. | | | 27,072 | | | | 1,193,063 | | | | 0.23 | % |
| Black Hills Corp. | | | 66,647 | | | | 4,351,383 | | | | 0.86 | % |
| CenterPoint Energy, Inc. | | | 467,428 | | | | 14,242,531 | | | | 2.80 | % |
| Chesapeake Utilities Corp. | | | 21,258 | | | | 2,625,363 | | | | 0.52 | % |
| CMS Energy Corp. | | | 184,598 | | | | 11,493,071 | | | | 2.26 | % |
| Consolidated Edison, Inc. | | | 145,336 | | | | 14,311,236 | | | | 2.82 | % |
| Dominion Energy, Inc. | | | 335,777 | | | | 19,186,298 | | | | 3.78 | % |
| DTE Energy Co. | | | 57,304 | | | | 6,441,543 | | | | 1.27 | % |
| Duke Energy Corp. | | | 119,487 | | | | 11,814,874 | | | | 2.33 | % |
| Entergy Corp. | | | 3,760 | | | | 404,501 | | | | 0.08 | % |
| Essential Utilities, Inc. | | | 186,100 | | | | 7,946,470 | | | | 1.56 | % |
| Eversource Energy | | | 62,075 | | | | 4,817,641 | | | | 0.95 | % |
| Exelon Corp. | | | 111,731 | | | | 4,741,864 | | | | 0.93 | % |
| Fortis, Inc. (a) | | | 133,876 | | | | 5,878,495 | | | | 1.16 | % |
The accompanying notes are an integral part of these financial statements.
| COMMON STOCKS | | Number of | | | | | | % of | |
| | | Shares | | | Value | | | Net Assets | |
| Utilities (Continued) | | | | | | | | | |
| MGE Energy, Inc. | | | 10,779 | | | $ | 825,779 | | | | 0.16 | % |
| National Fuel Gas Co. | | | 95,224 | | | | 5,323,021 | | | | 1.05 | % |
| National Grid PLC – ADR (a) | | | 238,944 | | | | 17,120,338 | | | | 3.37 | % |
| New Jersey Resources Corp. | | | 134,034 | | | | 6,921,516 | | | | 1.36 | % |
| NiSource, Inc. | | | 448,281 | | | | 12,758,077 | | | | 2.51 | % |
| Northwest Natural Holding Co. | | | 58,303 | | | | 2,737,909 | | | | 0.54 | % |
| NorthWestern Corp. | | | 20,698 | | | | 1,213,317 | | | | 0.24 | % |
| ONE Gas, Inc. | | | 96,075 | | | | 7,392,971 | | | | 1.45 | % |
| PG&E Corp. (b) | | | 904,449 | | | | 15,475,122 | | | | 3.05 | % |
| PPL Corp. | | | 105,319 | | | | 3,024,762 | | | | 0.60 | % |
| Public Service Enterprise Group, Inc. | | | 194,190 | | | | 12,272,808 | | | | 2.42 | % |
| RGC Resources, Inc. | | | 17,154 | | | | 328,499 | | | | 0.06 | % |
| Sempra Energy | | | 163,940 | | | | 25,491,031 | | | | 5.02 | % |
| Southwest Gas Holdings, Inc. | | | 76,917 | | | | 4,307,352 | | | | 0.85 | % |
| Spire, Inc. | | | 67,991 | | | | 4,605,030 | | | | 0.91 | % |
| The Southern Co. | | | 346,300 | | | | 25,470,365 | | | | 5.01 | % |
| UGI Corp. | | | 103,952 | | | | 3,521,894 | | | | 0.69 | % |
| Unitil Corp. | | | 16,898 | | | | 939,360 | | | | 0.18 | % |
| WEC Energy Group, Inc. | | | 202,840 | | | | 19,507,123 | | | | 3.84 | % |
| Xcel Energy, Inc. | | | 118,799 | | | | 8,305,238 | | | | 1.63 | % |
| | | | | | | | 322,800,879 | | | | 63.54 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $265,308,010) | | | | | | | 504,899,064 | | | | 99.38 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| SHORT-TERM INVESTMENTS – 0.58% | | Number of | | | | | | % of | |
| | | Shares | | | Value | | | Net Assets | |
| Money Market Funds – 0.58% | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | |
| Institutional Class, 4.73% (c) | | | 2,950,999 | | | $ | 2,950,999 | | | | 0.58 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $2,950,999) | | | | | | | 2,950,999 | | | | 0.58 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $268,259,009) – 99.96% | | | | | | | 507,850,063 | | | | 99.96 | % |
| Other Assets in Excess of Liabilities – 0.04% | | | | | | | 206,117 | | | | 0.04 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 508,056,180 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
ADR – American Depositary Receipt
PLC – Public Limited Company
| (a) | U.S.-traded security of a foreign corporation. |
| (b) | Non-income-producing security. |
| (c) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Energy | | $ | 150,898,709 | | | $ | — | | | $ | — | | | $ | 150,898,709 | |
| Financials | | | 26,652,639 | | | | — | | | | — | | | | 26,652,639 | |
| Industrials | | | 4,546,837 | | | | — | | | | — | | | | 4,546,837 | |
| Utilities | | | 322,800,879 | | | | — | | | | — | | | | 322,800,879 | |
| Total Common Stocks | | $ | 504,899,064 | | | $ | — | | | $ | — | | | $ | 504,899,064 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 2,950,999 | | | $ | — | | | $ | — | | | $ | 2,950,999 | |
| Total Short-Term Investments | | $ | 2,950,999 | | | $ | — | | | $ | — | | | $ | 2,950,999 | |
| Total Investments | | $ | 507,850,063 | | | $ | — | | | $ | — | | | $ | 507,850,063 | |
The accompanying notes are an integral part of these financial statements.
| SCHEDULE OF INVESTMENTS/STATEMENT OF ASSETS AND LIABILITIES |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $268,259,009) | | $ | 507,850,063 | |
| Dividends and interest receivable | | | 714,431 | |
| Receivable for fund shares sold | | | 103,830 | |
| Return of capital receivable | | | 172,192 | |
| Prepaid expenses and other assets | | | 35,002 | |
| Total assets | | | 508,875,518 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for fund shares redeemed | | | 370,536 | |
| Payable to advisor | | | 166,954 | |
| Payable to administrator | | | 92,611 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 66,376 | |
| Accrued service fees | | | 36,250 | |
| Accrued trustees fees | | | 4,461 | |
| Accrued expenses and other payables | | | 70,924 | |
| Total liabilities | | | 819,338 | |
| NET ASSETS | | $ | 508,056,180 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 282,298,622 | |
| Total distributable earnings | | | 225,757,558 | |
| Total net assets | | $ | 508,056,180 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 441,598,054 | |
| Shares issued and outstanding | | | 17,796,529 | |
| Net asset value, offering price, and redemption price per share | | $ | 24.81 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 66,458,126 | |
| Shares issued and outstanding | | | 2,685,235 | |
| Net asset value, offering price, and redemption price per share | | $ | 24.75 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 7,415,529 | |
| Interest income | | | 55,817 | |
| Total investment income | | | 7,471,346 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 1,044,048 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 386,048 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 49,862 | |
| Distribution fees – Investor Class (See Note 5) | | | 334,169 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 257,021 | |
| Service fees – Investor Class (See Note 5) | | | 222,779 | |
| Federal and state registration fees | | | 22,855 | |
| Reports to shareholders | | | 19,724 | |
| Compliance expense (See Note 5) | | | 13,228 | |
| Interest expense (See Note 7) | | | 12,440 | |
| Trustees’ fees and expenses | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Legal fees | | | 5,317 | |
| Other expenses | | | 140,619 | |
| Total expenses | | | 2,531,181 | |
| NET INVESTMENT INCOME | | $ | 4,940,165 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 10,015,908 | |
| Net change in unrealized appreciation/depreciation on investments | | | 1,106,331 | |
| Net gain on investments | | | 11,122,239 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 16,062,404 | |
(1) | Net of foreign taxes withheld and issuance fees of $281,967. |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 4,940,165 | | | $ | 10,843,179 | |
| Net realized gain on investments | | | 10,015,908 | | | | 49,402,174 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | 1,106,331 | | | | (11,790,358 | ) |
| Net increase in net assets resulting from operations | | | 16,062,404 | | | | 48,454,995 | |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (32,871,714 | ) | | | (46,296,164 | ) |
| Distributable earnings – Institutional Class | | | (5,827,068 | ) | | | (7,042,572 | ) |
| Total distributions | | | (38,698,782 | ) | | | (53,338,736 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 6,023,416 | | | | 38,263,106 | |
| Proceeds from shares subscribed – Institutional Class | | | 4,430,093 | | | | 60,525,251 | |
| Dividends reinvested – Investor Class | | | 31,011,675 | | | | 43,695,547 | |
| Dividends reinvested – Institutional Class | | | 5,502,838 | | | | 6,632,283 | |
| Cost of shares redeemed – Investor Class | | | (35,457,778 | ) | | | (77,677,738 | ) |
| Cost of shares redeemed – Institutional Class | | | (33,816,992 | ) | | | (33,930,524 | ) |
| Net increase (decrease) in net assets derived | | | | | | | | |
| from capital share transactions | | | (22,306,748 | ) | | | 37,507,925 | |
| TOTAL INCREASE (DECREASE) IN NET ASSETS | | | (44,943,126 | ) | | | 32,624,184 | |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 552,999,306 | | | | 520,375,122 | |
| End of period | | $ | 508,056,180 | | | $ | 552,999,306 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 240,017 | | | | 1,378,820 | |
| Shares sold – Institutional Class | | | 177,406 | | | | 2,219,309 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 1,249,571 | | | | 1,762,321 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 222,283 | | | | 266,844 | |
| Shares redeemed – Investor Class | | | (1,422,830 | ) | | | (2,942,205 | ) |
| Shares redeemed – Institutional Class | | | (1,336,294 | ) | | | (1,288,690 | ) |
| Net increase (decrease) in shares outstanding | | | (869,847 | ) | | | 1,396,399 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 25.91 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.23 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 0.54 | |
| Total from investment operations | | | 0.77 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.22 | ) |
| Dividends from net realized gains | | | (1.65 | ) |
| Total distributions | | | (1.87 | ) |
| Net asset value, end of period | | $ | 24.81 | |
| | | | | |
| TOTAL RETURN | | | 3.02 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 441.60 | |
| Ratio of expenses to average net assets | | | 1.01 | %(3) |
| Ratio of net investment income to average net assets | | | 1.84 | %(3) |
Portfolio turnover rate(4) | | | 5 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 26.09 | | | $ | 24.08 | | | $ | 29.64 | | | $ | 28.68 | | | $ | 30.35 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.50 | (1) | | | 0.52 | (1) | | | 0.58 | (1) | | | 0.56 | (1) | | | 0.65 | |
| | 1.98 | | | | 4.00 | | | | (4.14 | ) | | | 3.50 | | | | (1.52 | ) |
| | 2.48 | | | | 4.52 | | | | (3.56 | ) | | | 4.06 | | | | (0.87 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.50 | ) | | | (0.57 | ) | | | (0.56 | ) | | | (0.62 | ) | | | (0.64 | ) |
| | (2.16 | ) | | | (1.94 | ) | | | (1.44 | ) | | | (2.48 | ) | | | (0.16 | ) |
| | (2.66 | ) | | | (2.51 | ) | | | (2.00 | ) | | | (3.10 | ) | | | (0.80 | ) |
| $ | 25.91 | | | $ | 26.09 | | | $ | 24.08 | | | $ | 29.64 | | | $ | 28.68 | |
| | | | | | | | | | | | | | | | | | | |
| | 10.14 | % | | | 19.91 | % | | | -12.49 | % | | | 15.28 | % | | | -2.86 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 459.41 | | | $ | 457.31 | | | $ | 483.56 | | | $ | 764.10 | | | $ | 825.18 | |
| | 1.00 | % | | | 1.00 | % | | | 1.02 | % | | | 1.00 | % | | | 1.01 | % |
| | 1.88 | % | | | 2.06 | % | | | 2.24 | % | | | 1.98 | % | | | 2.18 | % |
| | 31 | % | | | 15 | % | | | 16 | % | | | 12 | % | | | 14 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 25.84 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.27 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 0.53 | |
| Total from investment operations | | | 0.80 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.24 | ) |
| Dividends from net realized gains | | | (1.65 | ) |
| Total distributions | | | (1.89 | ) |
| Net asset value, end of period | | $ | 24.75 | |
| | | | | |
| TOTAL RETURN | | | 3.17 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 66.46 | |
| Ratio of expenses to average net assets | | | 0.72 | %(3) |
| Ratio of net investment income to average net assets | | | 2.21 | %(3) |
Portfolio turnover rate(4) | | | 5 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 26.01 | | | $ | 24.01 | | | $ | 29.56 | | | $ | 28.65 | | | $ | 30.32 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.57 | (1) | | | 0.59 | (1) | | | 0.66 | (1) | | | 0.64 | (1) | | | 0.71 | |
| | 1.99 | | | | 3.99 | | | | (4.13 | ) | | | 3.50 | | | | (1.47 | ) |
| | 2.56 | | | | 4.58 | | | | (3.47 | ) | | | 4.14 | | | | (0.76 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.58 | ) | | | (0.65 | ) | | | (0.64 | ) | | | (0.73 | ) | | | (0.75 | ) |
| | (2.15 | ) | | | (1.93 | ) | | | (1.44 | ) | | | (2.50 | ) | | | (0.16 | ) |
| | (2.73 | ) | | | (2.58 | ) | | | (2.08 | ) | | | (3.23 | ) | | | (0.91 | ) |
| $ | 25.84 | | | $ | 26.01 | | | $ | 24.01 | | | $ | 29.56 | | | $ | 28.65 | |
| | | | | | | | | | | | | | | | | | | |
| | 10.53 | % | | | 20.29 | % | | | -12.22 | % | | | 15.63 | % | | | -2.51 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 93.58 | | | $ | 63.06 | | | $ | 66.46 | | | $ | 107.18 | | | $ | 107.75 | |
| | 0.68 | % | | | 0.69 | % | | | 0.70 | % | | | 0.69 | % | | | 0.65 | % |
| | 2.13 | % | | | 2.35 | % | | | 2.57 | % | | | 2.25 | % | | | 2.47 | % |
| | 31 | % | | | 15 | % | | | 16 | % | | | 12 | % | | | 14 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Gas Utility Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is income and capital appreciation. The Fund is a diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid at the end of each calendar quarter. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Partnership Accounting Policy – To the extent the Fund receives distributions from underlying partnerships in which it invests, the Fund records its pro rata share of income/loss and capital gains/losses and accordingly adjusts the cost basis of the underlying partnerships for return of capital. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. |
| NOTES TO THE FINANCIAL STATEMENTS |
| | Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity
| HENNESSY FUNDS | 1-800-966-4354 | |
Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $24,098,743 and $77,671,161, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.40%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may
| NOTES TO THE FINANCIAL STATEMENTS |
be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into an Administrative Services Agreement among the Fund, the Advisor, and the American Gas Association (“AGA”), pursuant to which the AGA provides administrative services to the Fund, including overseeing the calculation of the AGA Stock Index. ScottMadden, Inc. performs the actual computations required to produce the AGA Stock Index and receives a fee for such calculations pursuant to a contractual arrangement with AGA. AGA does not furnish other securities advice to the Fund or the Advisor or make recommendations regarding the purchase or sale of securities by the Fund. Under the terms of the Administrative Services Agreement, which has been approved by the Board, AGA provides the Fund with current information regarding the common stock composition of the AGA Stock Index at least monthly. In addition, on request, AGA provides the Fund and the Advisor with information on the natural gas industry. The Fund pays AGA a fee at an annual rate of 0.04% of the average daily net assets of the Fund.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office
| HENNESSY FUNDS | 1-800-966-4354 | |
of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $336,718 and 7.35%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included in the Statement of Operations. The maximum amount outstanding for the Fund during the period was $8,822,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 338,135,370 | |
| | Gross tax unrealized appreciation | | $ | 253,222,529 | |
| | Gross tax unrealized depreciation | | | (38,891,180 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 214,331,349 | |
| | Undistributed ordinary income | | $ | 2,970,511 | |
| | Undistributed long-term capital gains | | | 31,092,076 | |
| | Total distributable earnings | | $ | 34,062,587 | |
| | Other accumulated gain/(loss) | | $ | — | |
| | Total accumulated gain/(loss) | | $ | 248,393,936 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
| NOTES TO THE FINANCIAL STATEMENTS |
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 7,606,890 | | | $ | 10,974,058 | |
| | Long-term capital gains | | | 31,091,892 | | | | 42,364,678 | |
| | Total distributions | | $ | 38,698,782 | | | $ | 53,338,736 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,030.20 | $10.25 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,039.90 | $10.30 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,031.70 | $7.31 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,042.80 | $7.35 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.01% for Investor Class shares or 0.72% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 91.72%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 1.26%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | A summary of the advisory agreement; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (4) | The costs and profitability of the Fund to the Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| | | | | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; |
| | | | | |
| | | | (iii) | manages the use of soft dollars for the Fund; and |
| | | | | |
| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
(This Page Intentionally Left Blank.)
For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY JAPAN FUND
Investor Class HJPNX
Institutional Class HJPIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 9 |
| Statement of Operations | | 10 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 27 |
| Board Approval of Investment Advisory Agreements | | 28 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The Japanese stock market posted a total return of 18.08% in U.S. dollar terms as measured by the Tokyo Stock Price Index (TOPIX) over the six-month period ended April 30, 2023.
The Japanese stock market was on an upward trend until mid-November 2022 on expectations of future economic recovery due to a rebound in Japanese corporate performance, China’s easing of COVID-19 restrictions and real estate deregulation, and a retreat from excessive concerns about rising U.S. interest rates. However, in mid-December 2022, the Bank of Japan (BOJ) announced an increase in the allowable range of interest rates at its policy meeting, which the market perceived as effectively an interest rate hike, triggering a sharp decline in stock prices. The Japanese stock market turned around once the BOJ announced that it would maintain monetary easing and expectations emerged that the U.S. would ease its tight monetary policy.
This upward trend continued into February 2022 before multiple bank failures occurred in the U.S. and their impact on Credit Suisse fueled concerns of a credit crunch. Global stock markets plummeted in response, and Japanese equities suffered similarly. While the banking liquidity risk originating in the West is cause for concern, we do not think it will become a significant issue for Japanese financial institutions with ample capital. We think that Japanese corporate earnings should also remain high in the current fiscal year due to price pass-through, rising wages, and a recovery in inbound consumption. We also think there is significant room for recovery in the Manufacturing sector, which has suffered from rising material prices and parts shortages.
In April 2023, the famed investor Warren Buffett came to Tokyo to pay a visit to Japan’s five major trading houses, which have grown into a major position in Berkshire Hathaway’s publicly traded equity portfolio in recent years. Nowadays, Mr. Buffett is investing a significant amount in Japanese equities. The five major trading houses in which Berkshire made initial investments in 2020 have been cash flow generative. On a CNBC interview, Mr. Buffett shared some of his thoughts regarding these investments: “[T]hey were selling at what I felt was a ridiculous price, particularly the price compared to the interest rates prevailing at that time… And so, I started buying all five of the five largest trading companies . . . . I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield of maybe 14% or something like that with dividends that would grow, that they actually grew 70% during that time.” Mr. Buffet’s comments about Japanese companies reinforces our optimistic opinion of Japanese equities.
Thank you for your continued confidence and investment in the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund.
Sincerely,
 |  |
| Tadahiro Fujimura | Masakazu Takeda |
| Portfolio Manager, | Portfolio Manager, |
| Hennessy Japan Small Cap Fund; | Hennessy Japan Fund; |
| Chief Investment Officer | Fund Manager |
| SPARX Asset Management Co., Ltd. | SPARX Asset Management Co., Ltd. |
SPARX Asset Management Co., Ltd., located in Tokyo, Japan, is the sub-advisor to the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund.
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Tadahiro Fujimura and Masakazu Takeda and are subject to change, are not guaranteed, and should not be considered investment advice.
Fund holdings and sector allocations are subject to change. 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, may be subject to a higher degree of market risk.
The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all of the companies listed on the First Section of the Tokyo Stock Exchange. The index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index.
Cash flow refers to the net amount of cash and cash equivalents transferred into and out of a company.
Current and future holdings are subject to risk. Please refer to the Schedule of Investments included in this report for additional portfolio information.
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Japan Fund – | | | | |
| Investor Class (HJPNX) | 17.06% | 4.74% | -0.25% | 6.57% |
| Hennessy Japan Fund – | | | | |
| Institutional Class (HJPIX) | 17.29% | 5.09% | 0.14% | 6.95% |
Russell/Nomura Total Market™ Index | 17.93% | 7.09% | 1.16% | 4.86% |
| Tokyo Stock Price Index (TOPIX) | 18.08% | 7.13% | 0.99% | 4.67% |
Expense ratios: 1.44% (Investor Class); 1.05% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The Russell/Nomura Total Market™ Index represents approximately 98% of the investable Japan equity market. The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all of the companies listed on the First Section of the Tokyo Stock Exchange. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or Russell ratings or underlying data and no party may rely on any Russell Indexes or Russell ratings or underlying data contained in this communication. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY JAPAN FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Mitsubishi Corp. | 8.79% |
| Hitachi Ltd. | 8.67% |
| Rohto Pharmaceutical Co., Ltd. | 5.24% |
| Sony Group Corp. | 5.13% |
| Seven & i Holdings Co. Ltd. | 5.03% |
| Tokio Marine Holdings, Inc. | 4.49% |
| ORIX Corp. | 4.16% |
| Keyence Corp. | 3.82% |
| Tokyo Electron Ltd. | 3.66% |
| Fast Retailing Co., Ltd. | 3.50% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 95.50% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Communication Services – 3.00% | | | | | | | | | |
| Nippon Telegraph & Telephone Corp. | | | 227,700 | | | $ | 6,948,033 | | | | 3.00 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 10.42% | | | | | | | | | | | | |
| Asics Corp. | | | 147,900 | | | | 4,134,002 | | | | 1.79 | % |
| Fast Retailing Co., Ltd. | | | 34,200 | | | | 8,098,616 | | | | 3.50 | % |
| Sony Group Corp. | | | 131,300 | | | | 11,879,203 | | | | 5.13 | % |
| | | | | | | | 24,111,821 | | | | 10.42 | % |
| | | | | | | | | | | | | |
| Consumer Staples – 14.71% | | | | | | | | | | | | |
| Ariake Japan Co., Ltd. | | | 54,700 | | | | 2,218,447 | | | | 0.96 | % |
| Rohto Pharmaceutical Co., Ltd. | | | 584,500 | | | | 12,126,671 | | | | 5.24 | % |
| Seven & i Holdings Co. Ltd. | | | 256,700 | | | | 11,632,990 | | | | 5.03 | % |
| Unicharm Corp. | | | 199,500 | | | | 8,053,804 | | | | 3.48 | % |
| | | | | | | | 34,031,912 | | | | 14.71 | % |
| | | | | | | | | | | | | |
| Financials – 18.08% | | | | | | | | | | | | |
| Japan Exchange Group, Inc. | | | 180,100 | | | | 2,924,424 | | | | 1.27 | % |
| Mitsubishi UFJ Financial Group, Inc. | | | 1,246,900 | | | | 7,805,014 | | | | 3.37 | % |
| MS&AD Insurance Group Holdings, Inc. (a) | | | 171,600 | | | | 5,632,311 | | | | 2.44 | % |
| ORIX Corp. | | | 566,100 | | | | 9,630,790 | | | | 4.16 | % |
| Sompo Holdings, Inc. | | | 130,500 | | | | 5,445,713 | | | | 2.35 | % |
| Tokio Marine Holdings, Inc. | | | 516,400 | | | | 10,383,272 | | | | 4.49 | % |
| | | | | | | | 41,821,524 | | | | 18.08 | % |
| | | | | | | | | | | | | |
| Health Care – 9.55% | | | | | | | | | | | | |
| Hoya Corp. | | | 40,900 | | | | 4,288,571 | | | | 1.86 | % |
| Olympus Corp. | | | 342,100 | | | | 5,988,945 | | | | 2.59 | % |
| Santen Pharmaceutical Co. Ltd. | | | 570,100 | | | | 4,796,610 | | | | 2.07 | % |
| Terumo Corp. | | | 234,200 | | | | 7,013,305 | | | | 3.03 | % |
| | | | | | | | 22,087,431 | | | | 9.55 | % |
| | | | | | | | | | | | | |
| Industrials – 26.39% | | | | | | | | | | | | |
| Daikin Industries, Ltd. | | | 39,200 | | | | 7,119,938 | | | | 3.08 | % |
| Hitachi Ltd. | | | 362,600 | | | | 20,057,087 | | | | 8.67 | % |
| MISUMI Group, Inc. | | | 243,200 | | | | 6,135,257 | | | | 2.65 | % |
| Mitsubishi Corp. | | | 548,500 | | | | 20,336,116 | | | | 8.79 | % |
| Recruit Holdings Co., Ltd. | | | 263,800 | | | | 7,400,542 | | | | 3.20 | % |
| | | | | | | | 61,048,940 | | | | 26.39 | % |
The accompanying notes are an integral part of these financial statements.
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Information Technology – 8.35% | | | | | | | | | |
| Keyence Corp. | | | 19,600 | | | $ | 8,838,743 | | | | 3.82 | % |
| Renesas Electronics Corp. (a) | | | 61,200 | | | | 797,586 | | | | 0.35 | % |
| Rohm Co. Ltd. | | | 16,100 | | | | 1,212,140 | | | | 0.52 | % |
| Tokyo Electron Ltd. | | | 73,900 | | | | 8,461,957 | | | | 3.66 | % |
| | | | | | | | 19,310,426 | | | | 8.35 | % |
| | | | | | | | | | | | | |
| Materials – 5.00% | | | | | | | | | | | | |
| Nissan Chemical Corp. | | | 103,000 | | | | 4,577,531 | | | | 1.98 | % |
| Shin-Etsu Chemical Co. Ltd. | | | 245,300 | | | | 6,999,837 | | | | 3.02 | % |
| | | | | | | | 11,577,368 | | | | 5.00 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $162,192,779) | | | | | | | 220,937,455 | | | | 95.50 | % |
| | | | | | | | | | | | | |
| SHORT-TERM INVESTMENTS – 3.32% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Money Market Funds – 3.32% | | | | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.73% (b) | | | 7,690,346 | | | | 7,690,346 | | | | 3.32 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $7,690,346) | | | | | | | 7,690,346 | | | | 3.32 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $169,883,125) – 98.82% | | | | | | | 228,627,801 | | | | 98.82 | % |
| Other Assets in Excess of Liabilities – 1.18% | | | | | | | 2,731,067 | | | | 1.18 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 231,358,868 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
| (a) | Non-income-producing security. |
| (b) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Communication Services | | $ | — | | | $ | 6,948,033 | | | $ | — | | | $ | 6,948,033 | |
| Consumer Discretionary | | | — | | | | 24,111,821 | | | | — | | | | 24,111,821 | |
| Consumer Staples | | | — | | | | 34,031,912 | | | | — | | | | 34,031,912 | |
| Financials | | | — | | | | 41,821,524 | | | | — | | | | 41,821,524 | |
| Health Care | | | — | | | | 22,087,431 | | | | — | | | | 22,087,431 | |
| Industrials | | | — | | | | 61,048,940 | | | | — | | | | 61,048,940 | |
| Information Technology | | | — | | | | 19,310,426 | | | | — | | | | 19,310,426 | |
| Materials | | | — | | | | 11,577,368 | | | | — | | | | 11,577,368 | |
| Total Common Stocks | | $ | — | | | $ | 220,937,455 | | | $ | — | | | $ | 220,937,455 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 7,690,346 | | | $ | — | | | $ | — | | | $ | 7,690,346 | |
| Total Short-Term Investments | | $ | 7,690,346 | | | $ | — | | | $ | — | | | $ | 7,690,346 | |
| Total Investments | | $ | 7,690,346 | | | $ | 220,937,455 | | | $ | — | | | $ | 228,627,801 | |
The accompanying notes are an integral part of these financial statements.
| SCHEDULE OF INVESTMENTS/STATEMENT OF ASSETS AND LIABILITIES |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $169,883,125) | | $ | 228,627,801 | |
| Dividends and interest receivable | | | 2,699,467 | |
| Receivable for fund shares sold | | | 426,498 | |
| Prepaid expenses and other assets | | | 27,305 | |
| Total assets | | | 231,781,071 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for fund shares redeemed | | | 110,071 | |
| Payable to advisor | | | 153,218 | |
| Payable to sub-transfer agents | | | 72,551 | |
| Payable to administrator | | | 45,385 | |
| Payable to auditor | | | 11,230 | |
| Accrued distribution fees | | | 6,629 | |
| Accrued service fees | | | 3,679 | |
| Accrued trustees fees | | | 9,552 | |
| Accrued expenses and other payables | | | 9,888 | |
| Total liabilities | | | 422,203 | |
| NET ASSETS | | $ | 231,358,868 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 169,369,024 | |
| Total distributable earnings | | | 61,989,844 | |
| Total net assets | | $ | 231,358,868 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 44,859,701 | |
| Shares issued and outstanding | | | 1,302,262 | |
| Net asset value, offering price, and redemption price per share | | $ | 34.45 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 186,499,167 | |
| Shares issued and outstanding | | | 5,225,793 | |
| Net asset value, offering price, and redemption price per share | | $ | 35.69 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 3,027,654 | |
| Interest income | | | 182,334 | |
| Total investment income | | | 3,209,988 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 1,145,284 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 47,647 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 117,202 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 143,199 | |
| Interest expense (See Note 7) | | | 40,554 | |
| Distribution fees – Investor Class (See Note 5) | | | 32,952 | |
| Federal and state registration fees | | | 22,143 | |
| Service fees – Investor Class (See Note 5) | | | 21,968 | |
| Reports to shareholders | | | 16,684 | |
| Trustees’ fees and expenses | | | 11,905 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Legal fees | | | 4,572 | |
| Other expenses | | | 32,352 | |
| Total expenses | | | 1,659,533 | |
| NET INVESTMENT INCOME | | $ | 1,550,455 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 33,960,370 | |
| Net change in unrealized appreciation/depreciation on investments | | | 15,240,519 | |
| Net gain on investments | | | 49,200,889 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 50,751,344 | |
(1) | Net of foreign taxes withheld of $336,554. |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 1,550,455 | | | $ | 4,811 | |
| Net realized gain (loss) on investments | | | 33,960,370 | | | | (12,342,481 | ) |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | 15,240,519 | | | | (265,779,808 | ) |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | 50,751,344 | | | | (278,117,478 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | — | | | | (747,296 | ) |
| Distributable earnings – Institutional Class | | | — | | | | (11,015,401 | ) |
| Total distributions | | | — | | | | (11,762,697 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 6,887,525 | | | | 15,554,341 | |
| Proceeds from shares subscribed – Institutional Class | | | 38,422,806 | | | | 190,629,014 | |
| Dividends reinvested – Investor Class | | | — | | | | 703,285 | |
| Dividends reinvested – Institutional Class | | | — | | | | 10,598,719 | |
| Cost of shares redeemed – Investor Class | | | (8,370,680 | ) | | | (30,693,545 | ) |
| Cost of shares redeemed – Institutional Class | | | (171,121,488 | ) | | | (395,706,790 | ) |
| Net decrease in net assets derived | | | | | | | | |
| from capital share transactions | | | (134,181,837 | ) | | | (208,914,976 | ) |
| TOTAL DECREASE IN NET ASSETS | | | (83,430,493 | ) | | | (498,795,151 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 314,789,361 | | | | 813,584,512 | |
| End of period | | $ | 231,358,868 | | | $ | 314,789,361 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 211,937 | | | | 403,264 | |
| Shares sold – Institutional Class | | | 1,135,683 | | | | 4,980,990 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | — | | | | 15,157 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | — | | | | 221,545 | |
| Shares redeemed – Investor Class | | | (253,613 | ) | | | (876,884 | ) |
| Shares redeemed – Institutional Class | | | (4,954,031 | ) | | | (10,842,081 | ) |
| Net decrease in shares outstanding | | | (3,860,024 | ) | | | (6,098,009 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 29.43 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income (loss) | | | 0.19 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 4.83 | |
| Total from investment operations | | | 5.02 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | — | |
| Dividends from net realized gains | | | — | |
| Total distributions | | | — | |
| Net asset value, end of period | | $ | 34.45 | |
| | | | | |
| TOTAL RETURN | | | 17.06 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 44.86 | |
| Ratio of expenses to average net assets | | | 1.48 | %(4) |
| Ratio of net investment income (loss) to average net assets | | | 1.19 | %(4) |
Portfolio turnover rate(5) | | | 25 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 47.78 | | | $ | 42.79 | | | $ | 37.17 | | | $ | 33.63 | | | $ | 32.75 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.11 | )(1) | | | (0.23 | )(1) | | | (0.14 | )(1) | | | 0.05 | (1) | | | (0.00 | )(2) |
| | (17.83 | ) | | | 5.22 | | | | 5.81 | | | | 3.50 | | | | 0.89 | |
| | (17.94 | ) | | | 4.99 | | | | 5.67 | | | | 3.55 | | | | 0.89 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.41 | ) | | | — | | | | (0.02 | ) | | | (0.01 | ) | | | (0.01 | ) |
| | — | | | | — | | | | (0.03 | ) | | | — | | | | — | |
| | (0.41 | ) | | | — | | | | (0.05 | ) | | | (0.01 | ) | | | (0.01 | ) |
| $ | 29.43 | | | $ | 47.78 | | | $ | 42.79 | | | $ | 37.17 | | | $ | 33.63 | |
| | | | | | | | | | | | | | | | | | | |
| | -37.86 | % | | | 11.66 | % | | | 15.27 | % | | | 10.60 | % | | | 2.70 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 39.55 | | | $ | 86.11 | | | $ | 142.30 | | | $ | 87.22 | | | $ | 103.33 | |
| | 1.44 | % | | | 1.43 | % | | | 1.43 | % | | | 1.43 | % | | | 1.43 | % |
| | (0.30 | )% | | | (0.49 | )% | | | (0.37 | )% | | | 0.14 | % | | | (0.02 | )% |
| | 21 | % | | | 16 | % | | | 23 | % | | | 9 | % | | | 1 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 30.43 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income (loss) | | | 0.18 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 5.08 | |
| Total from investment operations | | | 5.26 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | — | |
| Dividends from net realized gains | | | — | |
| Total distributions | | | — | |
| Net asset value, end of period | | $ | 35.69 | |
| | | | | |
| TOTAL RETURN | | | 17.29 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 186.50 | |
| Ratio of expenses to average net assets | | | 1.10 | %(4) |
| Ratio of net investment income (loss) to average net assets | | | 1.06 | %(4) |
Portfolio turnover rate(5) | | | 25 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 49.54 | | | $ | 44.19 | | | $ | 38.37 | | | $ | 34.67 | | | $ | 33.64 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.02 | (1) | | | (0.03 | )(1) | | | 0.02 | (1) | | | 0.21 | (1) | | | 0.15 | |
| | (18.39 | ) | | | 5.38 | | | | 5.99 | | | | 3.60 | | | | 0.91 | |
| | (18.37 | ) | | | 5.35 | | | | 6.01 | | | | 3.81 | | | | 1.06 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.74 | ) | | | (0.00 | )(2) | | | (0.16 | ) | | | (0.11 | ) | | | (0.03 | ) |
| | — | | | | — | | | | (0.03 | ) | | | — | | | | — | |
| | (0.74 | ) | | | (0.00 | )(2) | | | (0.19 | ) | | | (0.11 | ) | | | (0.03 | ) |
| $ | 30.43 | | | $ | 49.54 | | | $ | 44.19 | | | $ | 38.37 | | | $ | 34.67 | |
| | | | | | | | | | | | | | | | | | | |
| | -37.63 | % | | | 12.11 | % | | | 15.72 | % | | | 11.02 | % | | | 3.14 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 275.24 | | | $ | 727.47 | | | $ | 608.11 | | | $ | 611.41 | | | $ | 399.76 | |
| | 1.05 | % | | | 1.04 | % | | | 1.04 | % | | | 1.03 | % | | | 1.01 | % |
| | 0.04 | % | | | (0.07 | )% | | | 0.04 | % | | | 0.59 | % | | | 0.49 | % |
| | 21 | % | | | 16 | % | | | 23 | % | | | 9 | % | | | 1 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Japan Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is long-term capital appreciation. The Fund is a diversified fund, but employs a relatively concentrated investment strategy and may hold securities of fewer issuers than other diversified funds.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax |
| NOTES TO THE FINANCIAL STATEMENTS |
| | positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| | |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Foreign Currency – Values of investments denominated in foreign currencies are converted into U.S. dollars using the spot market exchange rate at the time of valuation. Purchases and sales of investments and income are translated into U.S. dollars using the spot market exchange rate prevailing on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from fluctuations resulting from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain/loss on investments. Foreign investments present additional risks due to currency fluctuations, economic and political factors, lower liquidity, government regulations, differences in accounting standards, and other factors. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities |
| NOTES TO THE FINANCIAL STATEMENTS |
| | exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair
| HENNESSY FUNDS | 1-800-966-4354 | |
value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund invests in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $67,785,537 and $192,220,326, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor oversees the provision of investment advice and furnishes office space, facilities, and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.80%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Advisor has delegated the day-to-day management of the Fund to a sub-advisor, SPARX Asset Management Co., Ltd. The Advisor pays the sub-advisory fees from its own assets, and these fees are not an additional expense of the Fund. During the six months
| NOTES TO THE FINANCIAL STATEMENTS |
ended April 30, 2023, the Advisor (not the Fund) paid a sub-advisory fee at the average rate of 0.35% of the daily net assets of the Fund. Pursuant to the sub-advisory agreement, the Advisor pays sub-advisory fees at the rate of 0.35% of the first $500 million of daily net assets, 0.40% of daily net assets between $500 million and $1 billion, and 0.42% of daily net assets over $1 billion.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for
| HENNESSY FUNDS | 1-800-966-4354 | |
serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Fund, the Hennessy Gas Utility Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund had an outstanding average daily balance and a weighted average interest rate of $1,040,994 and 7.70%, respectively. The interest expensed by the Fund during the six months ended April 30, 2023, is included in the Statement of Operations. The maximum amount outstanding for the Fund during the period, was $27,613,000. As of April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 270,720,134 | |
| | Gross tax unrealized appreciation | | $ | 72,298,598 | |
| | Gross tax unrealized depreciation | | | (30,493,857 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 41,804,741 | |
| | Undistributed ordinary income | | $ | — | |
| | Undistributed long-term capital gains | | | — | |
| | Total distributable earnings | | $ | — | |
| | Other accumulated gain/(loss) | | $ | (30,566,241 | ) |
| | Total accumulated gain/(loss) | | $ | 11,238,500 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales and investments in passive foreign investment companies.
As of October 31, 2022, the Fund had $9,301,859 in unlimited long-term and $13,400,862 in unlimited short-term capital loss carryforwards.
| NOTES TO THE FINANCIAL STATEMENTS |
Capital losses sustained in or after fiscal year 2012 can be carried forward indefinitely, but any such loss retains the character of the original loss and must be utilized prior to any loss incurred before fiscal year 2012. As a result of this ordering rule, capital loss carryforwards incurred prior to fiscal year 2012 may be more likely to expire unused. Capital losses sustained prior to fiscal year 2012 can be carried forward for eight years and can be carried forward as short-term capital losses regardless of the character of the original loss.
As of October 31, 2022, the Fund deferred, on a tax basis, a late-year ordinary loss of $7,863,520. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | — | | | $ | 11,762,697 | |
| | Long-term capital gains | | | — | | | | — | |
| | Total distributions | | $ | — | | | $ | 11,762,697 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,170.60 | $16.06 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,035.20 | $15.06 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,172.90 | $11.95 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,039.00 | $11.21 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.48% for Investor Class shares or 1.10% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 69.62%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 0.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
For the year ended October 31, 2022, the Fund earned no foreign-source income and paid no foreign taxes.
Important Notice Regarding Delivery of
Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
| PROXY VOTING — ELECTRONIC DELIVERY |
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| HENNESSY FUNDS | 1-800-966-4354 | |
Board Approval of Investment Advisory
Agreements
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”) and the sub-advisory agreement for the Fund between the Advisor and SPARX Asset Management Co., Ltd. (the “Sub-Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory and sub-advisory agreements. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory and sub-advisory agreements.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory and sub-advisory agreements. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory and sub-advisory agreements and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory and sub-advisory agreements and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | Summaries of the advisory and sub-advisory agreements; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the Sub-Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale; |
| | | |
| | (9) | A completed questionnaire from the Sub-Advisor; |
| | | |
| | (10) | A summary of the Sub-Advisor’s responses to the questionnaire, as well as relevant information from the Sub-Advisor’s Form ADVs Parts 1 and 2 and the certifications submitted by the Sub-Advisor each quarter; |
| | | |
| | (11) | Financial information of the Sub-Advisor and its parent company; and |
| | | |
| | (12) | The Sub-Advisor’s Code of Ethics. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory and sub-advisory agreements. The Trustees recognized that the management and fee
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory and sub-advisory agreements, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor and the Sub-Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| | | |
| | (4) | The costs and profitability of the Fund to the Advisor and the Sub-Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor and the Sub-Advisor from serving as an investment advisor to the Fund (other than the advisory and sub-advisory fees). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor oversees the Sub-Advisor for the Fund, and the Sub-Advisor acts as the portfolio manager for the Fund by providing portfolio management services. |
| | | | |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Sub-Advisor and the Fund’s other service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Sub-Advisor and the Fund’s other service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | | (f) | The Advisor oversees the selection and continued employment of the Sub-Advisor, reviews the Fund’s investment performance, and monitors the Sub-Advisor’s adherence to the Fund’s investment objectives, policies, and restrictions. |
| | | | |
| | | (g) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (h) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| | | | |
| | | (i) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (j) | For each annual report of the Fund, the Advisor reviews the written summary prepared by the Sub-Advisor of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (k) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (l) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (m) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (n) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees considered the services identified below that are provided by the Sub-Advisor. Based on this review and an assessment of the Sub-Advisor’s performance, the Trustees concluded that the Sub-Advisor provides high-quality services to the Fund. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Sub-Advisor and that the nature and extent of the services provided by the Sub-Advisor were appropriate to assure that the Fund’s portfolio aligns properly with its investment objective and principal investment strategies. |
| | | (a) | The Sub-Advisor acts as the portfolio manager for the Fund. In this capacity, the Sub-Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
| | | | (ii) | seeks best execution for the Fund’s portfolio; and |
| | | | | |
| | | | (iii) | manages proxy voting for the Fund. |
| | | (b) | The Sub-Advisor ensures that its compliance program includes policies and procedures relevant to the Fund and the Sub-Advisor’s duties as a portfolio manager to the Fund. |
| | | | |
| | | (c) | For each annual report of the Fund, the Sub-Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (d) | The Sub-Advisor provides a quarterly compliance certification to the Board regarding trading and allocation practices, supervisory matters, the Sub-Advisor’s compliance program (including its code of ethics), compliance with the Fund’s policies, and general firm updates. |
| | (3) | Trustees considered the distinction between the services performed by the Advisor and the Sub-Advisor. The Trustees noted that the management of the Fund, including the oversight of the Sub-Advisor, involves more comprehensive and substantive duties than the duties of the Sub-Advisor. Specifically, the Trustees considered the lists of Advisor services previously identified and concluded that the services performed by the Advisor for the Fund require a higher level of service and oversight than the services performed by the Sub-Advisor. Based on this determination, the Trustees concluded that the differential in advisory fees between the Advisor and the Sub-Advisor is reasonable. |
| | | |
| | (4) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor and the Sub-Advisor manage the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory and sub-advisory agreements. |
| | | |
| | (5) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory and sub-advisory agreements. |
| | | |
| | (6) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees and sub-advisory fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (7) | The Trustees considered the profitability of the Advisor and the Sub-Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor and the Sub-Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (8) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (9) | The Trustees considered any benefits to the Advisor and the Sub-Advisor from serving as an advisor to the Fund (other than the advisory and sub-advisory fees). The Trustees noted that the Advisor and the Sub-Advisor may derive ancillary benefits from, by way of example, their association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor and the Sub-Advisor from their relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ findings that (i) the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s and the Sub-Advisor’s own efforts in the performance of their duties under the advisory and sub-advisory agreements and (ii) although the Sub-Advisor could derive benefits from the conversion of Fund shareholders into separate account clients, the Fund also could benefit from potential institutional shareholders who might choose to invest in the Fund. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor and the Sub-Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s and the Sub-Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory and sub-advisory agreements.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
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For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY JAPAN SMALL CAP FUND
Investor Class HJPSX
Institutional Class HJSIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 10 |
| Statement of Operations | | 11 |
| Statements of Changes in Net Assets | | 13 |
| Financial Highlights | | 14 |
| Notes to the Financial Statements | | 18 |
| Expense Example | | 26 |
| Proxy Voting Policy and Proxy Voting Records | | 28 |
| Availability of Quarterly Portfolio Schedule | | 28 |
| Federal Tax Distribution Information | | 28 |
| Important Notice Regarding Delivery of Shareholder Documents | | 28 |
| Electronic Delivery | | 29 |
| Board Approval of Investment Advisory Agreements | | 30 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The Japanese stock market posted a total return of 18.08% in U.S. dollar terms as measured by the Tokyo Stock Price Index (TOPIX) over the six-month period ended April 30, 2023.
The Japanese stock market was on an upward trend until mid-November 2022 on expectations of future economic recovery due to a rebound in Japanese corporate performance, China’s easing of COVID-19 restrictions and real estate deregulation, and a retreat from excessive concerns about rising U.S. interest rates. However, in mid-December 2022, the Bank of Japan (BOJ) announced an increase in the allowable range of interest rates at its policy meeting, which the market perceived as effectively an interest rate hike, triggering a sharp decline in stock prices. The Japanese stock market turned around once the BOJ announced that it would maintain monetary easing and expectations emerged that the U.S. would ease its tight monetary policy.
This upward trend continued into February 2022 before multiple bank failures occurred in the U.S. and their impact on Credit Suisse fueled concerns of a credit crunch. Global stock markets plummeted in response, and Japanese equities suffered similarly. While the banking liquidity risk originating in the West is cause for concern, we do not think it will become a significant issue for Japanese financial institutions with ample capital. We think that Japanese corporate earnings should also remain high in the current fiscal year due to price pass-through, rising wages, and a recovery in inbound consumption. We also think there is significant room for recovery in the Manufacturing sector, which has suffered from rising material prices and parts shortages.
In April 2023, the famed investor Warren Buffett came to Tokyo to pay a visit to Japan’s five major trading houses, which have grown into a major position in Berkshire Hathaway’s publicly traded equity portfolio in recent years. Nowadays, Mr. Buffett is investing a significant amount in Japanese equities. The five major trading houses in which Berkshire made initial investments in 2020 have been cash flow generative. On a CNBC interview, Mr. Buffett shared some of his thoughts regarding these investments: “[T]hey were selling at what I felt was a ridiculous price, particularly the price compared to the interest rates prevailing at that time… And so, I started buying all five of the five largest trading companies . . . . I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield of maybe 14% or something like that with dividends that would grow, that they actually grew 70% during that time.” Mr. Buffet’s comments about Japanese companies reinforces our optimistic opinion of Japanese equities.
Thank you for your continued confidence and investment in the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund.
Sincerely,
| |
| Tadahiro Fujimura | Masakazu Takeda |
| Portfolio Manager, | Portfolio Manager, |
| Hennessy Japan Small Cap Fund; | Hennessy Japan Fund; |
| Chief Investment Officer | Fund Manager |
| SPARX Asset Management Co., Ltd. | SPARX Asset Management Co., Ltd. |
SPARX Asset Management Co., Ltd., located in Tokyo, Japan, is the sub-advisor to the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund.
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Tadahiro Fujimura and Masakazu Takeda and are subject to change, are not guaranteed, and should not be considered investment advice.
Fund holdings and sector allocations are subject to change. 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, may be subject to a higher degree of market risk.
The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all of the companies listed on the First Section of the Tokyo Stock Exchange. The index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index.
Cash flow refers to the net amount of cash and cash equivalents transferred into and out of a company.
Current and future holdings are subject to risk. Please refer to the Schedule of Investments included in this report for additional portfolio information.
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Japan Small Cap Fund – | | | | |
| Investor Class (HJPSX) | 17.37% | 10.61% | -0.25% | 7.93% |
| Hennessy Japan Small Cap Fund – | | | | |
Institutional Class (HJSIX)(2) | 17.50% | 11.08% | 0.14% | 8.24% |
Russell/Nomura Small Cap™ Index | 17.25% | 10.05% | -2.08% | 4.65% |
| Tokyo Stock Price Index (TOPIX) | 18.08% | 7.13% | 0.99% | 4.67% |
Expense ratios: 1.58% (Investor Class); 1.18% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
(2) | The inception date of Institutional Class shares is June 15, 2015. Performance shown prior to the inception of Institutional Class shares reflects the performance of Investor Class shares and includes expenses that are not applicable to, and are higher than, those of Institutional Class shares. |
____________________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The Russell/Nomura Small Cap™ Index comprises the bottom 15% of the Russell/Nomura Total Market™ Index based on market capitalization. The Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index of all of the companies listed on the First Section of the Tokyo Stock Exchange. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or Russell ratings or underlying data and no party may rely on any Russell Indexes or Russell ratings or underlying data contained in this communication. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY JAPAN SMALL CAP FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Nippon Koei Co., Ltd. | 2.31% |
| Iwatani Corp. | 2.21% |
| Musashi Seimitsu Industry Co., Ltd. | 2.19% |
| Nihon Kohden Corp. | 2.15% |
| Kyoei Steel Ltd. | 2.07% |
| Aeon Fantasy Co., Ltd. | 2.02% |
| SBS Holdings, Inc. | 2.01% |
| Nojima Corp. | 2.00% |
| Takasago Thermal Engineering Co., Ltd. | 1.99% |
| J Front Retailing Co., Ltd. | 1.98% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 94.20% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Communication Services – 4.16% | | | | | | | | | |
| Imagica Group, Inc. | | | 229,600 | | | $ | 1,027,531 | | | | 0.98 | % |
| Kufu Co., Inc. (a) | | | 235,500 | | | | 835,417 | | | | 0.80 | % |
| Macromill, Inc. | | | 200,000 | | | | 1,331,629 | | | | 1.28 | % |
| ValueCommerce Co., Ltd. | | | 118,600 | | | | 1,148,804 | | | | 1.10 | % |
| | | | | | | | 4,343,381 | | | | 4.16 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 14.56% | | | | | | | | | | | | |
| Aeon Fantasy Co., Ltd. | | | 87,900 | | | | 2,115,154 | | | | 2.02 | % |
| Benesse Holdings, Inc. | | | 106,100 | | | | 1,522,814 | | | | 1.46 | % |
| J Front Retailing Co., Ltd. | | | 196,800 | | | | 2,069,796 | | | | 1.98 | % |
| Matsuoka Corp. | | | 127,500 | | | | 1,348,340 | | | | 1.29 | % |
| Musashi Seimitsu Industry Co., Ltd. | | | 169,900 | | | | 2,290,147 | | | | 2.19 | % |
| Nojima Corp. | | | 194,400 | | | | 2,085,444 | | | | 2.00 | % |
| Onward Holdings Co., Ltd. | | | 187,500 | | | | 518,837 | | | | 0.50 | % |
| Sac’s Bar Holdings, Inc. | | | 197,400 | | | | 1,277,709 | | | | 1.22 | % |
| Saizeriya Co., Ltd. | | | 78,900 | | | | 1,983,749 | | | | 1.90 | % |
| | | | | | | | 15,211,990 | | | | 14.56 | % |
| | | | | | | | | | | | | |
| Consumer Staples – 2.07% | | | | | | | | | | | | |
| Ariake Japan Co., Ltd. | | | 10,700 | | | | 433,956 | | | | 0.41 | % |
| Nishimoto Co., Ltd. | | | 60,700 | | | | 1,729,149 | | | | 1.66 | % |
| | | | | | | | 2,163,105 | | | | 2.07 | % |
| | | | | | | | | | | | | |
| Energy – 2.21% | | | | | | | | | | | | |
| Iwatani Corp. | | | 48,700 | | | | 2,305,594 | | | | 2.21 | % |
| | | | | | | | | | | | | |
| Financials – 4.15% | | | | | | | | | | | | |
| Lifenet Insurance Co. (a) | | | 149,200 | | | | 1,300,354 | | | | 1.25 | % |
| Musashino Bank, Ltd. | | | 125,600 | | | | 2,039,183 | | | | 1.95 | % |
| Zenkoku Hosho Co., Ltd. | | | 27,000 | | | | 992,362 | | | | 0.95 | % |
| | | | | | | | 4,331,899 | | | | 4.15 | % |
| | | | | | | | | | | | | |
| Health Care – 5.22% | | | | | | | | | | | | |
| Nihon Kohden Corp. | | | 81,300 | | | | 2,249,457 | | | | 2.15 | % |
| PeptiDream, Inc. (a) | | | 91,900 | | | | 1,241,658 | | | | 1.19 | % |
| Ship Healthcare Holdings, Inc. | | | 111,100 | | | | 1,959,785 | | | | 1.88 | % |
| | | | | | | | 5,450,900 | | | | 5.22 | % |
| | | | | | | | | | | | | |
| Industrials – 36.95% | | | | | | | | | | | | |
| Amada Co., Ltd. | | | 209,600 | | | | 1,957,035 | | | | 1.87 | % |
The accompanying notes are an integral part of these financial statements.
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Industrials (Continued) | | | | | | | | | |
| Benefit One, Inc. | | | 110,200 | | | $ | 1,516,825 | | | | 1.45 | % |
| Creek & River Co., Ltd. | | | 106,200 | | | | 1,661,820 | | | | 1.59 | % |
| Daihen Corp. | | | 53,500 | | | | 1,761,826 | | | | 1.69 | % |
| Glory Ltd. | | | 94,000 | | | | 1,998,573 | | | | 1.91 | % |
| Hanwa Co., Ltd. | | | 50,300 | | | | 1,557,544 | | | | 1.49 | % |
| Kawada Technologies, Inc. | | | 40,600 | | | | 1,217,960 | | | | 1.17 | % |
| Keihan Holdings Co., Ltd. | | | 57,000 | | | | 1,569,000 | | | | 1.50 | % |
| Mitsubishi Logisnext Co., Ltd. | | | 219,400 | | | | 1,597,805 | | | | 1.53 | % |
| Nichiha Corp. | | | 58,400 | | | | 1,233,907 | | | | 1.18 | % |
| Nippon Koei Co., Ltd. | | | 86,400 | | | | 2,408,866 | | | | 2.31 | % |
| Nissei ASB Machine Co., Ltd. | | | 54,700 | | | | 1,715,645 | | | | 1.64 | % |
| Nittoku Co., Ltd. | | | 72,900 | | | | 1,403,157 | | | | 1.34 | % |
| Penta-Ocean Construction Co., Ltd. | | | 220,000 | | | | 1,069,569 | | | | 1.02 | % |
| Sato Holdings Corp. | | | 80,800 | | | | 1,367,315 | | | | 1.31 | % |
| SBS Holdings, Inc. | | | 86,000 | | | | 2,095,660 | | | | 2.01 | % |
| Tadano Ltd. | | | 237,300 | | | | 1,857,469 | | | | 1.78 | % |
| Takasago Thermal Engineering Co., Ltd. | | | 124,000 | | | | 2,082,121 | | | | 1.99 | % |
| Tanseisha Co., Ltd. | | | 278,200 | | | | 1,652,263 | | | | 1.58 | % |
| Tocalo Co., Ltd. | | | 55,000 | | | | 516,516 | | | | 0.50 | % |
| Transcosmos, Inc. | | | 59,400 | | | | 1,385,943 | | | | 1.33 | % |
| TRE Holdings Corp. | | | 151,900 | | | | 1,330,897 | | | | 1.28 | % |
| Tsubakimoto Chain Co. | | | 73,400 | | | | 1,818,024 | | | | 1.74 | % |
| Tsukishima Holdings Co., Ltd. | | | 224,000 | | | | 1,817,304 | | | | 1.74 | % |
| | | | | | | | 38,593,044 | | | | 36.95 | % |
| | | | | | | | | | | | | |
| Information Technology – 14.18% | | | | | | | | | | | | |
| Macnica Holdings, Inc. | | | 37,800 | | | | 1,038,755 | | | | 1.00 | % |
| Maxell Ltd. | | | 181,400 | | | | 1,997,871 | | | | 1.91 | % |
| Mimaki Engineering Co., Ltd. | | | 285,200 | | | | 1,417,024 | | | | 1.36 | % |
| Money Forward, Inc. (a) | | | 24,400 | | | | 1,016,122 | | | | 0.97 | % |
| NEC Networks & System Integration Corp. | | | 137,900 | | | | 1,718,996 | | | | 1.65 | % |
| Nippon Signal Company, Ltd. | | | 237,100 | | | | 1,936,220 | | | | 1.85 | % |
| SIIX Corp. | | | 180,000 | | | | 1,807,167 | | | | 1.73 | % |
| Towa Corp. | | | 122,800 | | | | 1,847,952 | | | | 1.77 | % |
| WingArc1st, Inc. | | | 61,700 | | | | 1,007,137 | | | | 0.96 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Information Technology (Continued) | | | | | | | | | |
| Yamaichi Electronics Co., Ltd. | | | 76,900 | | | $ | 1,020,920 | | | | 0.98 | % |
| | | | | | | | 14,808,164 | | | | 14.18 | % |
| | | | | | | | | | | | | |
| Materials – 7.23% | | | | | | | | | | | | |
| Asia Pile Holdings Corp. | | | 366,200 | | | | 1,992,135 | | | | 1.91 | % |
| Kyoei Steel Ltd. | | | 160,200 | | | | 2,166,016 | | | | 2.07 | % |
| Maeda Kosen Co., Ltd. | | | 66,000 | | | | 1,579,253 | | | | 1.51 | % |
| Tokyo Ohka Kogyo Co., Ltd. | | | 34,800 | | | | 1,816,672 | | | | 1.74 | % |
| | | | | | | | 7,554,076 | | | | 7.23 | % |
| | | | | | | | | | | | | |
| Real Estate – 2.37% | | | | | | | | | | | | |
| Star Mica Holdings Co., Ltd. | | | 165,400 | | | | 783,327 | | | | 0.75 | % |
| Tosei Corp. | | | 141,900 | | | | 1,688,632 | | | | 1.62 | % |
| | | | | | | | 2,471,959 | | | | 2.37 | % |
| | | | | | | | | | | | | |
| Utilities – 1.10% | | | | | | | | | | | | |
| EF-ON, Inc. | | | 244,900 | | | | 1,151,829 | | | | 1.10 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $95,879,748) | | | | | | | 98,385,941 | | | | 94.20 | % |
| | | | | | | | | | | | | |
| SHORT-TERM INVESTMENTS – 4.49% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Money Market Funds – 4.49% | | | | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.73% (b) | | | 4,686,598 | | | | 4,686,598 | | | | 4.49 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $4,686,598) | | | | | | | 4,686,598 | | | | 4.49 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $100,566,346) – 98.69% | | | | | | | 103,072,539 | | | | 98.69 | % |
| Other Assets in Excess of Liabilities – 1.31% | | | | | | | 1,363,226 | | | | 1.31 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 104,435,765 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
| (a) | Non-income-producing security. |
| (b) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
The accompanying notes are an integral part of these financial statements.
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Communication Services | | $ | — | | | $ | 4,343,381 | | | $ | — | | | $ | 4,343,381 | |
| Consumer Discretionary | | | — | | | | 15,211,990 | | | | — | | | | 15,211,990 | |
| Consumer Staples | | | — | | | | 2,163,105 | | | | — | | | | 2,163,105 | |
| Energy | | | — | | | | 2,305,594 | | | | — | | | | 2,305,594 | |
| Financials | | | — | | | | 4,331,899 | | | | — | | | | 4,331,899 | |
| Health Care | | | — | | | | 5,450,900 | | | | — | | | | 5,450,900 | |
| Industrials | | | — | | | | 38,593,044 | | | | — | | | | 38,593,044 | |
| Information Technology | | | — | | | | 14,808,164 | | | | — | | | | 14,808,164 | |
| Materials | | | — | | | | 7,554,076 | | | | — | | | | 7,554,076 | |
| Real Estate | | | — | | | | 2,471,959 | | | | — | | | | 2,471,959 | |
| Utilities | | | — | | | | 1,151,829 | | | | — | | | | 1,151,829 | |
| Total Common Stocks | | $ | — | | | $ | 98,385,941 | | | $ | — | | | $ | 98,385,941 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 4,686,598 | | | $ | — | | | $ | — | | | $ | 4,686,598 | |
| Total Short-Term Investments | | $ | 4,686,598 | | | $ | — | | | $ | — | | | $ | 4,686,598 | |
| Total Investments | | $ | 4,686,598 | | | $ | 98,385,941 | | | $ | — | | | $ | 103,072,539 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $100,566,346) | | $ | 103,072,539 | |
| Dividends and interest receivable | | | 1,243,360 | |
| Receivable for fund shares sold | | | 17,740 | |
| Receivable for securities sold | | | 500,503 | |
| Prepaid expenses and other assets | | | 18,723 | |
| Total assets | | | 104,852,865 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for securities purchased | | | 277,666 | |
| Payable for fund shares redeemed | | | 10,867 | |
| Payable to advisor | | | 69,390 | |
| Payable to administrator | | | 18,328 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 5,106 | |
| Accrued service fees | | | 2,804 | |
| Accrued trustees fees | | | 4,935 | |
| Accrued expenses and other payables | | | 16,778 | |
| Total liabilities | | | 417,100 | |
| NET ASSETS | | $ | 104,435,765 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 103,438,884 | |
| Total distributable earnings | | | 996,881 | |
| Total net assets | | $ | 104,435,765 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 34,503,882 | |
| Shares issued and outstanding | | | 2,257,728 | |
| Net asset value, offering price, and redemption price per share | | $ | 15.28 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 69,931,883 | |
| Shares issued and outstanding | | | 4,642,309 | |
| Net asset value, offering price, and redemption price per share | | $ | 15.06 | |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF ASSETS AND LIABILITIES/STATEMENT OF OPERATIONS |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 1,355,582 | |
| Interest income | | | 125,087 | |
| Total investment income | | | 1,480,669 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 386,670 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 36,751 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 25,944 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 50,536 | |
| Distribution fees – Investor Class (See Note 5) | | | 24,856 | |
| Federal and state registration fees | | | 20,446 | |
| Service fees – Investor Class (See Note 5) | | | 16,570 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Trustees’ fees and expenses | | | 9,760 | |
| Reports to shareholders | | | 7,145 | |
| Legal fees | | | 840 | |
| Other expenses | | | 8,456 | |
| Total expenses | | | 611,045 | |
| NET INVESTMENT INCOME | | $ | 869,624 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized loss on investments | | $ | (243,743 | ) |
| Net change in unrealized appreciation/depreciation on investments | | | 13,852,795 | |
| Net gain on investments | | | 13,609,052 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 14,478,676 | |
(1) | Net of foreign taxes withheld of $150,786. |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
| STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 869,624 | | | $ | 949,649 | |
| Net realized loss on investments | | | (243,743 | ) | | | (2,110,306 | ) |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | 13,852,795 | | | | (29,078,282 | ) |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | 14,478,676 | | | | (30,238,939 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (198,569 | ) | | | (186,236 | ) |
| Distributable earnings – Institutional Class | | | (658,423 | ) | | | (589,255 | ) |
| Total distributions | | | (856,992 | ) | | | (775,491 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 2,546,073 | | | | 6,437,217 | |
| Proceeds from shares subscribed – Institutional Class | | | 27,767,152 | | | | 38,467,373 | |
| Dividends reinvested – Investor Class | | | 191,702 | | | | 180,038 | |
| Dividends reinvested – Institutional Class | | | 641,326 | | | | 571,970 | |
| Cost of shares redeemed – Investor Class | | | (4,508,813 | ) | | | (8,822,706 | ) |
| Cost of shares redeemed – Institutional Class | | | (14,703,478 | ) | | | (39,666,483 | ) |
| Net increase (decrease) in net assets | | | | | | | | |
| derived from capital share transactions | | | 11,933,962 | | | | (2,832,591 | ) |
| TOTAL INCREASE (DECREASE) IN NET ASSETS | | | 25,555,646 | | | | (33,847,021 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 78,880,119 | | | | 112,727,140 | |
| End of period | | $ | 104,435,765 | | | $ | 78,880,119 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 172,406 | | | | 424,356 | |
| Shares sold – Institutional Class | | | 1,933,520 | | | | 2,624,209 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 13,791 | | | | 10,154 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 46,881 | | | | 33,206 | |
| Shares redeemed – Investor Class | | | (311,424 | ) | | | (598,751 | ) |
| Shares redeemed – Institutional Class | | | (1,013,101 | ) | | | (2,693,301 | ) |
| Net increase (decrease) in shares outstanding | | | 842,073 | | | | (200,127 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 13.10 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.10 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 2.16 | |
| Total from investment operations | | | 2.26 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.08 | ) |
| Dividends from net realized gains | | | — | |
| Total distributions | | | (0.08 | ) |
| Net asset value, end of period | | $ | 15.28 | |
| | | | | |
| TOTAL RETURN | | | 17.37 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 34.50 | |
| Ratio of expenses to average net assets | | | 1.52 | %(4) |
| Ratio of net investment income to average net assets | | | 1.42 | %(4) |
Portfolio turnover rate(5) | | | 19 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 18.12 | | | $ | 15.73 | | | $ | 15.43 | | | $ | 14.99 | | | $ | 14.92 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.12 | (1) | | | 0.03 | (1) | | | 0.01 | (1) | | | 0.03 | (1) | | | 0.05 | |
| | (5.07 | ) | | | 2.40 | | | | 0.50 | | | | 0.88 | | | | 0.35 | |
| | (4.95 | ) | | | 2.43 | | | | 0.51 | | | | 0.91 | | | | 0.40 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.00 | )(2) | | | (0.04 | ) | | | (0.21 | ) | | | — | | | | (0.05 | ) |
| | (0.07 | ) | | | — | | | | — | | | | (0.47 | ) | | | (0.28 | ) |
| | (0.07 | ) | | | (0.04 | ) | | | (0.21 | ) | | | (0.47 | ) | | | (0.33 | ) |
| $ | 13.10 | | | $ | 18.12 | | | $ | 15.73 | | | $ | 15.43 | | | $ | 14.99 | |
| | | | | | | | | | | | | | | | | | | |
| | -27.41 | % | | | 15.46 | % | | | 3.27 | % | | | 6.30 | % | | | 2.64 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 31.23 | | | $ | 46.15 | | | $ | 46.41 | | | $ | 66.30 | | | $ | 100.93 | |
| | 1.57 | % | | | 1.53 | % | | | 1.55 | % | | | 1.52 | % | | | 1.46 | % |
| | 0.83 | % | | | 0.16 | % | | | 0.09 | % | | | 0.23 | % | | | 0.21 | % |
| | 45 | % | | | 24 | % | | | 17 | % | | | 21 | % | | | 35 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 12.97 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.14 | (1) |
| Net realized and unrealized gains (losses) on investments | | | 2.11 | |
| Total from investment operations | | | 2.25 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.16 | ) |
| Dividends from net realized gains | | | — | |
| Total distributions | | | (0.16 | ) |
| Net asset value, end of period | | $ | 15.06 | |
| | | | | |
| TOTAL RETURN | | | 17.50 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 69.93 | |
| Ratio of expenses to average net assets | | | 1.13 | %(3) |
| Ratio of net investment income to average net assets | | | 2.00 | %(3) |
Portfolio turnover rate(4) | | | 19 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 17.94 | | | $ | 15.58 | | | $ | 15.28 | | | $ | 14.83 | | | $ | 14.72 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.18 | (1) | | | 0.11 | (1) | | | 0.07 | (1) | | | 0.09 | (1) | | | 0.11 | |
| | (4.99 | ) | | | 2.37 | | | | 0.50 | | | | 0.86 | | | | 0.36 | |
| | (4.81 | ) | | | 2.48 | | | | 0.57 | | | | 0.95 | | | | 0.47 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.09 | ) | | | (0.12 | ) | | | (0.27 | ) | | | (0.04 | ) | | | (0.08 | ) |
| | (0.07 | ) | | | — | | | | — | | | | (0.46 | ) | | | (0.28 | ) |
| | (0.16 | ) | | | (0.12 | ) | | | (0.27 | ) | | | (0.50 | ) | | | (0.36 | ) |
| $ | 12.97 | | | $ | 17.94 | | | $ | 15.58 | | | $ | 15.28 | | | $ | 14.83 | |
| | | | | | | | | | | | | | | | | | | |
| | -27.05 | % | | | 15.90 | % | | | 3.69 | % | | | 6.73 | % | | | 3.12 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 47.65 | | | $ | 66.58 | | | $ | 34.58 | | | $ | 63.78 | | | $ | 98.42 | |
| | 1.17 | % | | | 1.13 | % | | | 1.13 | % | | | 1.12 | % | | | 1.04 | % |
| | 1.22 | % | | | 0.63 | % | | | 0.45 | % | | | 0.61 | % | | | 0.77 | % |
| | 45 | % | | | 24 | % | | | 17 | % | | | 21 | % | | | 35 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Japan Small Cap Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is long-term capital appreciation. The Fund is a diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Foreign Currency – Values of investments denominated in foreign currencies are converted into U.S. dollars using the spot market exchange rate at the time of valuation. Purchases and sales of investments and income are translated into U.S. dollars using the spot market exchange rate prevailing on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from fluctuations resulting from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain/loss on investments. Foreign investments present additional risks due to currency fluctuations, economic and political factors, lower liquidity, government regulations, differences in accounting standards, and other factors. |
| | |
| j.) | REIT Equity Securities – Distributions received from real estate investment trusts (“REITs”) may be classified as dividends, capital gains, or return of capital. Investments in REITs may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make any required distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. At other |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | times, investments in a REIT may result in the Fund’s receipt of cash in excess of the REIT’s earnings. If the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for U.S. federal income tax purposes. Dividends received by the Fund from a REIT generally do not constitute qualified dividend income and do not qualify for the dividends-received deduction. |
| | |
| k). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| l). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| NOTES TO THE FINANCIAL STATEMENTS |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the |
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| | security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund invests in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $27,798,891 and $17,407,081, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor oversees the provision of investment advice and
| NOTES TO THE FINANCIAL STATEMENTS |
furnishes office space, facilities, and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.80%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Advisor has delegated the day-to-day management of the Fund to a sub-advisor, SPARX Asset Management Co., Ltd. The Advisor pays the sub-advisory fees from its own assets, and these fees are not an additional expense of the Fund. During the six months ended April 30, 2023, the Advisor (not the Fund) paid a sub-advisory fee at the average rate of 0.35% of the daily net assets of the Fund. Pursuant to the sub-advisory agreement, the Advisor pays sub-advisory fees at the rate of 0.35% of the first $500 million of daily net assets, 0.40% of daily net assets between $500 million and $1 billion, and 0.42% of daily net assets over $1 billion.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule
| HENNESSY FUNDS | 1-800-966-4354 | |
that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Fund, the Hennessy Gas Utility Fund, and the Hennessy Japan Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 89,768,318 | |
| | Gross tax unrealized appreciation | | $ | 5,052,323 | |
| | Gross tax unrealized depreciation | | | (17,054,423 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | (12,002,100 | ) |
| | Undistributed ordinary income | | $ | 812,870 | |
| | Undistributed long-term capital gains | | | — | |
| | Total distributable earnings | | $ | 812,870 | |
| | Other accumulated gain/(loss) | | $ | (1,435,573 | ) |
| | Total accumulated gain/(loss) | | $ | (12,624,803 | ) |
| NOTES TO THE FINANCIAL STATEMENTS |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales and investments in passive foreign investment companies.
As of October 31, 2022, the Fund had $1,435,573 in unlimited short-term capital loss carryforwards.
Capital losses sustained in or after fiscal year 2012 can be carried forward indefinitely, but any such loss retains the character of the original loss and must be utilized prior to any loss incurred before fiscal year 2012. As a result of this ordering rule, capital loss carryforwards incurred prior to fiscal year 2012 may be more likely to expire unused. Capital losses sustained prior to fiscal year 2012 can be carried forward for eight years and can be carried forward as short-term capital losses regardless of the character of the original loss.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 856,992 | | | $ | 327,698 | |
| | Long-term capital gains | | | — | | | | 447,793 | |
| | Total distributions | | $ | 856,992 | | | $ | 775,491 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,173.70 | $16.52 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,034.80 | $15.46 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,175.00 | $12.29 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,038.70 | $11.52 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.52% for Investor Class shares or 1.13% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 0.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
For the year ended October 31, 2022, the Fund earned foreign-source income and paid foreign taxes as noted below, which it intends to pass through to its shareholders pursuant to Section 853 of the Internal Revenue Code.
| | Country | Gross Foreign Income | Foreign Tax Paid | |
| | Japan | $2,341,032 | $234,991 | |
Important Notice Regarding Delivery of
Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
| PROXY VOTING — ELECTRONIC DELIVERY |
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| HENNESSY FUNDS | 1-800-966-4354 | |
Board Approval of Investment Advisory
Agreements
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”) and the sub-advisory agreement for the Fund between the Advisor and SPARX Asset Management Co., Ltd. (the “Sub-Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory and sub-advisory agreements. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory and sub-advisory agreements.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory and sub-advisory agreements. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory and sub-advisory agreements and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory and sub-advisory agreements and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | Summaries of the advisory and sub-advisory agreements; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the Sub-Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale; |
| | | |
| | (9) | A completed questionnaire from the Sub-Advisor; |
| | | |
| | (10) | A summary of the Sub-Advisor’s responses to the questionnaire, as well as relevant information from the Sub-Advisor’s Form ADVs Parts 1 and 2 and the certifications submitted by the Sub-Advisor each quarter; |
| | | |
| | (11) | Financial information of the Sub-Advisor and its parent company; and |
| | | |
| | (12) | The Sub-Advisor’s Code of Ethics. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory and sub-advisory agreements. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory and sub-advisory agreements, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor and the Sub-Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| | | |
| | (4) | The costs and profitability of the Fund to the Advisor and the Sub-Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor and the Sub-Advisor from serving as an investment advisor to the Fund (other than the advisory and sub-advisory fees). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor oversees the Sub-Advisor for the Fund, and the Sub-Advisor acts as the portfolio manager for the Fund by providing portfolio management services. |
| | | | |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Sub-Advisor and the Fund’s other service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Sub-Advisor and the Fund’s other service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | | (f) | The Advisor oversees the selection and continued employment of the Sub-Advisor, reviews the Fund’s investment performance, and monitors the Sub-Advisor’s adherence to the Fund’s investment objectives, policies, and restrictions. |
| | | | |
| | | (g) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (h) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| | | | |
| | | (i) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (j) | For each annual report of the Fund, the Advisor reviews the written summary prepared by the Sub-Advisor of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (k) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (l) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (m) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (n) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees considered the services identified below that are provided by the Sub-Advisor. Based on this review and an assessment of the Sub-Advisor’s performance, the Trustees concluded that the Sub-Advisor provides high-quality services to the Fund. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Sub-Advisor and that the nature and extent of the services provided by the Sub-Advisor were appropriate to assure that the Fund’s portfolio aligns properly with its investment objective and principal investment strategies. |
| | | (a) | The Sub-Advisor acts as the portfolio manager for the Fund. In this capacity, the Sub-Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
| | | | (ii) | seeks best execution for the Fund’s portfolio; and |
| | | | | |
| | | | (iii) | manages proxy voting for the Fund. |
| | | (b) | The Sub-Advisor ensures that its compliance program includes policies and procedures relevant to the Fund and the Sub-Advisor’s duties as a portfolio manager to the Fund. |
| | | | |
| | | (c) | For each annual report of the Fund, the Sub-Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (d) | The Sub-Advisor provides a quarterly compliance certification to the Board regarding trading and allocation practices, supervisory matters, the Sub-Advisor’s compliance program (including its code of ethics), compliance with the Fund’s policies, and general firm updates. |
| | (3) | Trustees considered the distinction between the services performed by the Advisor and the Sub-Advisor. The Trustees noted that the management of the Fund, including the oversight of the Sub-Advisor, involves more comprehensive and substantive duties than the duties of the Sub-Advisor. Specifically, the Trustees considered the lists of Advisor services previously identified and concluded that the services performed by the Advisor for the Fund require a higher level of service and oversight than the services performed by the Sub-Advisor. Based on this determination, the Trustees concluded that the differential in advisory fees between the Advisor and the Sub-Advisor is reasonable. |
| | | |
| | (4) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor and the Sub-Advisor manage the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory and sub-advisory agreements. |
| | | |
| | (5) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory and sub-advisory agreements. |
| | | |
| | (6) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees and sub-advisory fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (7) | The Trustees considered the profitability of the Advisor and the Sub-Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor and the Sub-Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (8) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (9) | The Trustees considered any benefits to the Advisor and the Sub-Advisor from serving as an advisor to the Fund (other than the advisory and sub-advisory fees). The Trustees noted that the Advisor and the Sub-Advisor may derive ancillary benefits from, by way of example, their association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor and the Sub-Advisor from their relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ findings that (i) the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s and the Sub-Advisor’s own efforts in the performance of their duties under the advisory and sub-advisory agreements and (ii) although the Sub-Advisor could derive benefits from the conversion of Fund shareholders into separate account clients, the Fund also could benefit from potential institutional shareholders who might choose to invest in the Fund. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor and the Sub-Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s and the Sub-Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory and sub-advisory agreements.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS |
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For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY LARGE CAP FINANCIAL FUND
Investor Class HLFNX
Institutional Class HILFX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 8 |
| Statement of Operations | | 9 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 26 |
| Board Approval of Investment Advisory Agreement | | 27 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Large Cap Financial Fund – | | | | |
| Investor Class (HLFNX) | -15.46% | -17.36% | 0.43% | 6.13% |
| Hennessy Large Cap Financial Fund – | | | | |
Institutional Class (HILFX)(2) | -15.33% | -17.08% | 0.79% | 6.44% |
Russell 1000® Index Financials | -1.77% | -1.46% | 9.20% | 11.50% |
Russell 1000® Index | 8.01% | 1.82% | 11.07% | 11.95% |
Expense ratios: 1.69% (Investor Class); 1.33% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
(2) | The inception date of Institutional Class shares is June 15, 2015. Performance shown prior to the inception of Institutional Class shares reflects the performance of Investor Class shares and includes expenses that are not applicable to, and are higher than, those of Institutional Class shares. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The Russell 1000® Index Financials is a subset of the Russell 1000® Index that measures the performance of securities classified in the Financials sector of the large-cap U.S. equity market. The Russell 1000® Index is a subset of the Russell 3000® Index that measures the performance of the large-cap segment of the U.S. equity market. The Russell 1000® Index comprises the 1,000 largest companies in the Russell 3000® Index based on market capitalization and current index membership, representing approximately 93% of the total market capitalization of the Russell 3000® Index. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or Russell ratings or underlying data and no party may rely on any Russell Indexes or Russell ratings or underlying data contained in this communication. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY LARGE CAP FINANCIAL FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Citizens Financial Group, Inc. | 4.96% |
| Bank of America Corp. | 4.87% |
| JPMorgan Chase & Co. | 4.84% |
| Berkshire Hathaway, Inc., Class B | 4.79% |
| M&T Bank Corp. | 4.77% |
| Mastercard, Inc., Class A | 4.76% |
| Visa, Inc., Class A | 4.75% |
| Wells Fargo & Co. | 4.75% |
| Morgan Stanley | 4.72% |
| Webster Financial Corp. | 4.57% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 87.42% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Financials – 87.42% | | | | | | | | | |
| Bank of America Corp. | | | 57,000 | | | $ | 1,668,960 | | | | 4.87 | % |
| Berkshire Hathaway, Inc., Class B (a) | | | 5,000 | | | | 1,642,750 | | | | 4.79 | % |
| Capital One Financial Corp. | | | 7,000 | | | | 681,100 | | | | 1.99 | % |
| Citigroup, Inc. | | | 28,000 | | | | 1,317,960 | | | | 3.84 | % |
| Citizens Financial Group, Inc. | | | 55,000 | | | | 1,701,700 | | | | 4.96 | % |
| Comerica, Inc. | | | 32,000 | | | | 1,387,840 | | | | 4.05 | % |
| Fidelity National Information Services, Inc. | | | 26,000 | | | | 1,526,720 | | | | 4.45 | % |
| Fifth Third Bancorp | | | 55,000 | | | | 1,441,000 | | | | 4.20 | % |
| Fiserv, Inc. (a) | | | 10,000 | | | | 1,221,200 | | | | 3.56 | % |
| Huntington Bancshares, Inc. | | | 30,000 | | | | 336,000 | | | | 0.98 | % |
| JPMorgan Chase & Co. | | | 12,000 | | | | 1,658,880 | | | | 4.84 | % |
| KeyCorp | | | 100,000 | | | | 1,126,000 | | | | 3.28 | % |
| M&T Bank Corp. | | | 13,000 | | | | 1,635,400 | | | | 4.77 | % |
| Mastercard, Inc., Class A | | | 4,300 | | | | 1,634,129 | | | | 4.76 | % |
| Morgan Stanley | | | 18,000 | | | | 1,619,460 | | | | 4.72 | % |
| PayPal Holdings, Inc. (a) | | | 16,000 | | | | 1,216,000 | | | | 3.55 | % |
| State Street Corp. | | | 10,000 | | | | 722,600 | | | | 2.11 | % |
| The Charles Schwab Corp. | | | 8,000 | | | | 417,920 | | | | 1.22 | % |
| The Goldman Sachs Group, Inc. | | | 4,500 | | | | 1,545,480 | | | | 4.51 | % |
| Truist Financial Corp. | | | 3,000 | | | | 97,740 | | | | 0.28 | % |
| Visa, Inc., Class A | | | 7,000 | | | | 1,629,110 | | | | 4.75 | % |
| Webster Financial Corp. | | | 42,000 | | | | 1,566,600 | | | | 4.57 | % |
| Wells Fargo & Co. | | | 41,000 | | | | 1,629,750 | | | | 4.75 | % |
| Western Alliance Bancorp | | | 15,000 | | | | 556,800 | | | | 1.62 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $26,949,591) | | | | | | | 29,981,099 | | | | 87.42 | % |
| | | | | | | | | | | | | |
| REITS – 2.61% | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Financials – 2.61% | | | | | | | | | | | | |
| AGNC Investment Corp. | | | 50,000 | | | | 495,500 | | | | 1.44 | % |
| Annaly Capital Management, Inc. | | | 20,000 | | | | 399,600 | | | | 1.17 | % |
| | | | | | | | | | | | | |
| Total REITS | | | | | | | | | | | | |
| (Cost $704,754) | | | | | | | 895,100 | | | | 2.61 | % |
The accompanying notes are an integral part of these financial statements.
| SHORT-TERM INVESTMENTS – 12.40% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Money Market Funds – 12.40% | | | | | | | | | |
| Fidelity Government Portfolio, Institutional Class, 4.73% (b) | | | 847,132 | | | $ | 847,132 | | | | 2.47 | % |
| First American Government Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.73% (b) | | | 1,702,000 | | | | 1,702,000 | | | | 4.96 | % |
| First American Treasury Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.76% (b) | | | 1,702,000 | | | | 1,702,000 | | | | 4.97 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $4,251,132) | | | | | | | 4,251,132 | | | | 12.40 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $31,905,477) – 102.43% | | | | | | | 35,127,331 | | | | 102.43 | % |
| Liabilities in Excess of Other Assets – (2.43)% | | | | | | | (834,479 | ) | | | (2.43 | )% |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 34,292,852 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
REIT – Real Estate Investment Trust
| (a) | Non-income-producing security. |
| (b) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financials | | $ | 29,981,099 | | | $ | — | | | $ | — | | | $ | 29,981,099 | |
| Total Common Stocks | | $ | 29,981,099 | | | $ | — | | | $ | — | | | $ | 29,981,099 | |
| REITS | | | | | | | | | | | | | | | | |
| Financials | | $ | 895,100 | | | $ | — | | | $ | — | | | $ | 895,100 | |
| Total REITS | | $ | 895,100 | | | $ | — | | | $ | — | | | $ | 895,100 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 4,251,132 | | | $ | — | | | $ | — | | | $ | 4,251,132 | |
| Total Short-Term Investments | | $ | 4,251,132 | | | $ | — | | | $ | — | | | $ | 4,251,132 | |
| Total Investments | | $ | 35,127,331 | | | $ | — | | | $ | — | | | $ | 35,127,331 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $31,905,477) | | $ | 35,127,331 | |
| Dividends and interest receivable | | | 61,207 | |
| Receivable for fund shares sold | | | 21,617 | |
| Prepaid expenses and other assets | | | 18,580 | |
| Total assets | | | 35,228,735 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for securities purchased | | | 780,631 | |
| Payable for fund shares redeemed | | | 95,526 | |
| Payable to advisor | | | 25,216 | |
| Payable to administrator | | | 6,800 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 2,885 | |
| Accrued service fees | | | 1,523 | |
| Accrued trustees fees | | | 5,136 | |
| Accrued expenses and other payables | | | 6,940 | |
| Total liabilities | | | 935,883 | |
| NET ASSETS | | $ | 34,292,852 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 36,335,395 | |
| Accumulated deficit | | | (2,042,543 | ) |
| Total net assets | | $ | 34,292,852 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 18,719,475 | |
| Shares issued and outstanding | | | 958,369 | |
| Net asset value, offering price, and redemption price per share | | $ | 19.53 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 15,573,377 | |
| Shares issued and outstanding | | | 790,282 | |
| Net asset value, offering price, and redemption price per share | | $ | 19.71 | |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF ASSETS AND LIABILITIES/STATEMENT OF OPERATIONS |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
| Dividend income | | $ | 650,382 | |
| Interest income | | | 58,726 | |
| Total investment income | | | 709,108 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 184,914 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 21,705 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 12,599 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 24,375 | |
| Federal and state registration fees | | | 16,598 | |
| Distribution fees – Investor Class (See Note 5) | | | 16,307 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Service fees – Investor Class (See Note 5) | | | 10,871 | |
| Trustees’ fees and expenses | | | 9,559 | |
| Reports to shareholders | | | 5,315 | |
| Legal fees | | | 553 | |
| Other expenses | | | 5,792 | |
| Total expenses | | | 331,659 | |
| NET INVESTMENT INCOME | | $ | 377,449 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized loss on investments: | | $ | (4,300,616 | ) |
| Net change in unrealized appreciation/deprecation on investments: | | | (2,527,172 | ) |
| Net loss on investments | | | (6,827,788 | ) |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | (6,450,339 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
| STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 377,449 | | | $ | 415,244 | |
| Net realized gain (loss) on investments | | | (4,300,616 | ) | | | 3,448,215 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | (2,527,172 | ) | | | (23,178,978 | ) |
| Net decrease in net assets resulting from operations | | | (6,450,339 | ) | | | (19,315,519 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (1,558,247 | ) | | | (1,687,916 | ) |
| Distributable earnings – Institutional Class | | | (1,514,267 | ) | | | (1,797,726 | ) |
| Total distributions | | | (3,072,514 | ) | | | (3,485,642 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 383,136 | | | | 2,685,032 | |
| Proceeds from shares subscribed – Institutional Class | | | 529,336 | | | | 11,877,575 | |
| Dividends reinvested – Investor Class | | | 1,514,582 | | | | 1,636,787 | |
| Dividends reinvested – Institutional Class | | | 1,483,155 | | | | 1,782,399 | |
| Cost of shares redeemed – Investor Class | | | (1,770,421 | ) | | | (6,195,638 | ) |
| Cost of shares redeemed – Institutional Class | | | (4,100,674 | ) | | | (14,692,333 | ) |
| Net decrease in net assets derived | | | | | | | | |
| from capital share transactions | | | (1,960,886 | ) | | | (2,906,178 | ) |
| TOTAL DECREASE IN NET ASSETS | | | (11,483,739 | ) | | | (25,707,339 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 45,776,591 | | | | 71,483,930 | |
| End of period | | $ | 34,292,852 | | | $ | 45,776,591 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 18,998 | | | | 92,861 | |
| Shares sold – Institutional Class | | | 23,211 | | | | 380,400 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 66,893 | | | | 50,270 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 64,811 | | | | 54,242 | |
| Shares redeemed – Investor Class | | | (79,975 | ) | | | (221,850 | ) |
| Shares redeemed – Institutional Class | | | (179,996 | ) | | | (536,409 | ) |
| Net decrease in shares outstanding | | | (86,058 | ) | | | (180,486 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 24.80 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income (loss) | | | 0.19 | (1) |
| Net realized and unrealized gains (losses) on investments | | | (3.80 | ) |
| Total from investment operations | | | (3.61 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.13 | ) |
| Dividends from net realized gains | | | (1.53 | ) |
| Total distributions | | | (1.66 | ) |
| Net asset value, end of period | | $ | 19.53 | |
| | | | | |
| TOTAL RETURN | | | -15.46 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 18.72 | |
| Ratio of expenses to average net assets | | | 1.77 | %(3) |
| Ratio of net investment income (loss) to average net assets | | | 1.68 | %(3) |
Portfolio turnover rate(4) | | | 64 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 35.32 | | | $ | 22.33 | | | $ | 22.63 | | | $ | 21.43 | | | $ | 22.02 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.15 | (1) | | | (0.15 | )(1) | | | (0.05 | )(1) | | | (0.05 | )(1) | | | (0.07 | ) |
| | (9.02 | ) | | | 13.14 | | | | (0.25 | ) | | | 1.84 | | | | 0.48 | |
| | (8.87 | ) | | | 12.99 | | | | (0.30 | ) | | | 1.79 | | | | 0.41 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | — | | | | — | | | | — | | | | — | | | | — | |
| | (1.65 | ) | | | — | | | | — | | | | (0.59 | ) | | | (1.00 | ) |
| | (1.65 | ) | | | — | | | | — | | | | (0.59 | ) | | | (1.00 | ) |
| $ | 24.80 | | | $ | 35.32 | | | $ | 22.33 | | | $ | 22.63 | | | $ | 21.43 | |
| | | | | | | | | | | | | | | | | | | |
| | -26.22 | % | | | 58.17 | % | | | -1.33 | % | | | 8.75 | % | | | 1.82 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 23.63 | | | $ | 36.42 | | | $ | 22.51 | | | $ | 23.63 | | | $ | 40.99 | |
| | 1.69 | % | | | 1.68 | % | | | 1.75 | % | | | 1.82 | % | | | 1.69 | % |
| | 0.55 | % | | | (0.47 | )% | | | (0.21 | )% | | | (0.23 | )% | | | (0.44 | )% |
| | 78 | % | | | 62 | % | | | 88 | % | | | 83 | % | | | 64 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 25.11 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income (loss) | | | 0.22 | (1) |
| Net realized and unrealized gains (losses) on investments | | | (3.83 | ) |
| Total from investment operations | | | (3.61 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.24 | ) |
| Dividends from net realized gains | | | (1.55 | ) |
| Total distributions | | | (1.79 | ) |
| Net asset value, end of period | | $ | 19.71 | |
| | | | | |
| TOTAL RETURN | | | -15.33 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 15.57 | |
| Ratio of expenses to average net assets | | | 1.44 | %(3) |
| Ratio of net investment income (loss) to average net assets | | | 1.91 | %(3) |
Portfolio turnover rate(4) | | | 64 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 35.63 | | | $ | 22.44 | | | $ | 22.68 | | | $ | 21.39 | | | $ | 21.91 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.25 | (1) | | | (0.03 | )(1) | | | 0.02 | (1) | | | 0.01 | (1) | | | 0.03 | |
| | (9.10 | ) | | | 13.22 | | | | (0.26 | ) | | | 1.87 | | | | 0.45 | |
| | (8.85 | ) | | | 13.19 | | | | (0.24 | ) | | | 1.88 | | | | 0.48 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | — | | | | — | | | | — | | | | — | | | | — | |
| | (1.67 | ) | | | — | | | | — | | | | (0.59 | ) | | | (1.00 | ) |
| | (1.67 | ) | | | — | | | | — | | | | (0.59 | ) | | | (1.00 | ) |
| $ | 25.11 | | | $ | 35.63 | | | $ | 22.44 | | | $ | 22.68 | | | $ | 21.39 | |
| | | | | | | | | | | | | | | | | | | |
| | -25.95 | % | | | 58.78 | % | | | -1.06 | % | | | 9.16 | % | | | 2.16 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 22.15 | | | $ | 35.06 | | | $ | 21.15 | | | $ | 21.97 | | | $ | 8.85 | |
| | 1.33 | % | | | 1.32 | % | | | 1.45 | % | | | 1.43 | % | | | 1.34 | % |
| | 0.89 | % | | | (0.11 | )% | | | 0.08 | % | | | 0.05 | % | | | (0.07 | )% |
| | 78 | % | | | 62 | % | | | 88 | % | | | 83 | % | | | 64 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Large Cap Financial Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is capital appreciation. The Fund is a non-diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i.) | REIT Equity Securities – Distributions received from real estate investment trusts (“REITs”) may be classified as dividends, capital gains, or return of capital. Investments in REITs may require the Fund to accrue and distribute income not yet received. To generate sufficient cash to make any required distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. At other times, investments in a REIT may result in the Fund’s receipt of cash in excess of the REIT’s earnings. If the Fund distributes these amounts, these distributions could constitute a return of capital to Fund shareholders for U.S. federal income tax purposes. Dividends received by the Fund from a REIT generally do not constitute qualified dividend income and do not qualify for the dividends-received deduction. |
| | |
| j). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| k). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
| | |
| | In March 2020, FASB issued Accounting Standards Update 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The main objective of the new guidance was to provide relief to companies that would be impacted by the expected change in benchmark interest rates at the end of 2021, when participating banks would no longer be required to submit London Interbank Offered Rate (“LIBOR”) quotes by the UK Financial Conduct Authority. The new guidance allows companies to account for contract modifications as a continuance of the existing contract without additional analysis, provided that the only change to existing contracts is a change to an approved benchmark interest rate. In addition, derivative contracts that qualified for hedge accounting prior to contract modification will be allowed to continue to receive such treatment even if critical terms change due to a change in the benchmark interest rate. For new and existing contracts, the Fund may elect to apply the amendments as of March 12, 2020 through December 31, 2022. See Note 9 for more information. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived |
| NOTES TO THE FINANCIAL STATEMENTS |
| | | valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $24,915,881 and $32,256,913, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
| NOTES TO THE FINANCIAL STATEMENTS |
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.90%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
| HENNESSY FUNDS | 1-800-966-4354 | |
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 42,121,163 | |
| | Gross tax unrealized appreciation | | $ | 8,915,170 | |
| | Gross tax unrealized depreciation | | | (4,300,458 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 4,614,712 | |
| | Undistributed ordinary income | | $ | 127,166 | |
| | Undistributed long-term capital gains | | | 2,738,432 | |
| | Total distributable earnings | | $ | 2,865,598 | |
| | Other accumulated gain/(loss) | | $ | — | |
| | Total accumulated gain/(loss) | | $ | 7,480,310 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
| NOTES TO THE FINANCIAL STATEMENTS |
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 334,082 | | | $ | — | |
| | Long-term capital gains | | | 2,738,432 | | | | 3,485,642 | |
| | Total distributions | | $ | 3,072,514 | | | $ | 3,485,642 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). LIBOR TRANSITION
The Fund invests in securities of financial institutions that may be involved in financings based on, among other floating rates, LIBOR. Determined by the ICE Benchmark Administration, LIBOR is an average interest rate that banks charge one another for the use of short-term money. In 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced plans to phase out the use of LIBOR by the end of 2021. Most LIBOR settings are no longer being published as of December 31, 2021, and the FCA and ICE Benchmark Administrator have announced that a majority of U.S. dollar LIBOR settings will cease publication after June 30, 2023. The U.S. Federal Reserve has begun publishing the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR. Other regulators and industry groups around the world have announced or begun publishing proposed alternative reference rates for other currencies, but global consensus is lacking, and the process for amending many existing contracts or instruments to transition away from LIBOR remains unclear. Uncertainty related to the liquidity impact of the change in reference rates and how to appropriately adjust these rates at the time of transition may lead to increased volatility and illiquidity in markets tied to LIBOR, reduce the value of LIBOR-related instruments, and reduce the effectiveness of hedging strategies, which could adversely affect the Fund’s performance. Moreover, the risks associated with this discontinuation and transition could be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on the Fund until new reference rates and fallbacks for both legacy and new instruments and contracts are commercially accepted and market practices become settled.
10). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market
| HENNESSY FUNDS | 1-800-966-4354 | |
volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
11). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| NOTES TO THE FINANCIAL STATEMENTS |
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| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $ 845.40 | $16.33 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,032.30 | $17.99 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $ 846.70 | $13.30 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,035.60 | $14.66 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.77% for Investor Class shares or 1.44% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 0.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 0.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | A summary of the advisory agreement; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (4) | The costs and profitability of the Fund to the Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| | | | | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; |
| | | | | |
| | | | (iii) | manages the use of soft dollars for the Fund; and |
| | | | | |
| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
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For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY SMALL CAP FINANCIAL FUND
Investor Class HSFNX
Institutional Class HISFX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 8 |
| Statement of Operations | | 9 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 26 |
| Board Approval of Investment Advisory Agreement | | 27 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Small Cap Financial Fund – | | | | |
| Investor Class (HSFNX) | -24.64% | -18.95% | 0.56% | 6.30% |
| Hennessy Small Cap Financial Fund – | | | | |
| Institutional Class (HISFX) | -24.51% | -18.61% | 0.92% | 6.69% |
Russell 2000® Index Financials | -17.01% | -11.78% | 1.12% | 6.37% |
Russell 2000® Index | -3.45% | -3.65% | 4.15% | 7.88% |
Expense ratios: 1.59% (Investor Class); 1.22% (Institutional Class)
(1) | Periods of less than one year are not annualized. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The Russell 2000® Index Financials is a subset of the Russell 2000® Index that measures the performance of securities classified in the Financials sector of the small-cap U.S. equity market. The Russell 2000® Index is a subset of the Russell 3000® Index that measures the performance of the small-cap segment of the U.S. equity market. The Russell 2000® Index comprises the smallest 2,000 companies in the Russell 3000® Index based on market capitalization and current index membership, representing approximately 7% of the total market capitalization of the Russell 3000® Index. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or Russell ratings or underlying data and no party may rely on any Russell Indexes or Russell ratings or underlying data contained in this communication. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY SMALL CAP FINANCIAL FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| New York Community Bancorp, Inc. | 4.75% |
| Hancock Whitney Corp. | 4.45% |
| BankUnited, Inc. | 4.20% |
| Midland States Bancorp, Inc. | 4.02% |
| OceanFirst Financial Corp. | 4.02% |
| Texas Capital Bancshares, Inc. | 3.96% |
| Old National Bancorp | 3.94% |
| Wintrust Financial Corp. | 3.92% |
| Lakeland Bancorp, Inc. | 3.91% |
| Northeast Community Bancorp, Inc. | 3.84% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 92.40% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Financials – 92.40% | | | | | | | | | |
| Associated Banc-Corp. | | | 150,000 | | | $ | 2,674,500 | | | | 3.84 | % |
| BankUnited, Inc. | | | 130,000 | | | | 2,931,500 | | | | 4.20 | % |
| Banner Corp. | | | 23,000 | | | | 1,148,160 | | | | 1.65 | % |
| Cadence Bank | | | 60,000 | | | | 1,213,200 | | | | 1.74 | % |
| Cambridge Bancorp | | | 51,000 | | | | 2,634,150 | | | | 3.78 | % |
| Columbia Banking System, Inc. | | | 80,000 | | | | 1,708,800 | | | | 2.45 | % |
| ConnectOne Bancorp, Inc. | | | 165,000 | | | | 2,603,700 | | | | 3.74 | % |
| Eastern Bankshares, Inc. | | | 200,000 | | | | 2,330,000 | | | | 3.34 | % |
| First BanCorp. (a) | | | 215,000 | | | | 2,526,250 | | | | 3.62 | % |
| First Citizens BancShares, Inc. | | | 2,000 | | | | 2,014,360 | | | | 2.89 | % |
| Flushing Financial Corp. | | | 135,000 | | | | 1,624,050 | | | | 2.33 | % |
| Hancock Whitney Corp. | | | 85,000 | | | | 3,104,200 | | | | 4.45 | % |
| Hingham Institution for Savings | | | 6,000 | | | | 1,167,360 | | | | 1.68 | % |
| HomeTrust Bancshares, Inc. | | | 105,000 | | | | 2,191,350 | | | | 3.14 | % |
| Independent Bank Corp. | | | 43,000 | | | | 2,408,000 | | | | 3.45 | % |
| Kearny Financial Corp. of Maryland | | | 45,000 | | | | 350,550 | | | | 0.50 | % |
| Lakeland Bancorp, Inc. | | | 190,000 | | | | 2,724,600 | | | | 3.91 | % |
| Midland States Bancorp, Inc. | | | 140,000 | | | | 2,800,000 | | | | 4.02 | % |
| New York Community Bancorp, Inc. | | | 310,000 | | | | 3,313,900 | | | | 4.75 | % |
| Northeast Community Bancorp, Inc. | | | 205,000 | | | | 2,679,350 | | | | 3.84 | % |
| OceanFirst Financial Corp. | | | 175,000 | | | | 2,800,000 | | | | 4.02 | % |
| Old National Bancorp | | | 205,000 | | | | 2,749,050 | | | | 3.94 | % |
| Orange County Bancorp, Inc. | | | 21,000 | | | | 762,510 | | | | 1.09 | % |
| Pacific Premier Bancorp, Inc. | | | 75,000 | | | | 1,668,000 | | | | 2.39 | % |
| PacWest Bancorp | | | 205,000 | | | | 2,080,750 | | | | 2.99 | % |
| Shore Bancshares, Inc. | | | 15,000 | | | | 199,200 | | | | 0.29 | % |
| Texas Capital Bancshares, Inc. (b) | | | 55,000 | | | | 2,763,750 | | | | 3.96 | % |
| Washington Federal, Inc. | | | 25,000 | | | | 701,000 | | | | 1.01 | % |
| Western New England Bancorp, Inc. | | | 365,000 | | | | 2,471,050 | | | | 3.55 | % |
| Wintrust Financial Corp. | | | 40,000 | | | | 2,734,800 | | | | 3.92 | % |
| WSFS Financial Corp. | | | 38,000 | | | | 1,336,460 | | | | 1.92 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $64,641,617) | | | | | | | 64,414,550 | | | | 92.40 | % |
The accompanying notes are an integral part of these financial statements.
| SHORT-TERM INVESTMENTS – 11.80% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Money Market Funds – 11.80% | | | | | | | | | |
| Fidelity Government Portfolio, Institutional Class, 4.73% (c) | | | 1,327,308 | | | $ | 1,327,308 | | | | 1.90 | % |
| First American Government Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.73% (c) | | | 3,450,000 | | | | 3,450,000 | | | | 4.95 | % |
| First American Treasury Obligations Fund, | | | | | | | | | | | | |
| Institutional Class, 4.76% (c) | | | 3,450,000 | | | | 3,450,000 | | | | 4.95 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $8,227,308) | | | | | | | 8,227,308 | | | | 11.80 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $72,868,925) – 104.20% | | | | | | | 72,641,858 | | | | 104.20 | % |
| Liabilities in Excess of Other Assets – (4.20)% | | | | | | | (2,924,666 | ) | | | (4.20 | )% |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 69,717,192 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
| (a) | U.S.-traded security of a foreign corporation. |
| (b) | Non-income-producing security. |
| (c) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financials | | $ | 64,414,550 | | | $ | — | | | $ | — | | | $ | 64,414,550 | |
| Total Common Stocks | | $ | 64,414,550 | | | $ | — | | | $ | — | | | $ | 64,414,550 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 8,227,308 | | | $ | — | | | $ | — | | | $ | 8,227,308 | |
| Total Short-Term Investments | | $ | 8,227,308 | | | $ | — | | | $ | — | | | $ | 8,227,308 | |
| Total Investments | | $ | 72,641,858 | | | $ | — | | | $ | — | | | $ | 72,641,858 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $72,868,925) | | $ | 72,641,858 | |
| Dividends and interest receivable | | | 47,279 | |
| Receivable for fund shares sold | | | 28,536 | |
| Receivable for securities sold | | | 102,859 | |
| Prepaid expenses and other assets | | | 21,168 | |
| Total assets | | | 72,841,700 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable for securities purchased | | | 2,975,175 | |
| Payable for fund shares redeemed | | | 38,656 | |
| Payable to advisor | | | 54,112 | |
| Payable to administrator | | | 14,869 | |
| Payable to auditor | | | 11,226 | |
| Accrued distribution fees | | | 10,545 | |
| Accrued service fees | | | 5,030 | |
| Accrued trustees fees | | | 5,432 | |
| Accrued expenses and other payables | | | 9,463 | |
| Total liabilities | | | 3,124,508 | |
| NET ASSETS | | $ | 69,717,192 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 69,048,997 | |
| Total distributable earnings | | | 668,195 | |
| Total net assets | | $ | 69,717,192 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 58,752,001 | |
| Shares issued and outstanding | | | 2,881,231 | |
| Net asset value, offering price, and redemption price per share | | $ | 20.39 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 10,965,191 | |
| Shares issued and outstanding | | | 930,087 | |
| Net asset value, offering price, and redemption price per share | | $ | 11.79 | |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF ASSETS AND LIABILITIES/STATEMENT OF OPERATIONS |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 1,235,943 | |
| Interest income | | | 138,975 | |
| Total investment income | | | 1,374,918 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 431,661 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 78,958 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 8,526 | |
| Distribution fees – Investor Class (See Note 5) | | | 59,161 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 50,621 | |
| Service fees – Investor Class (See Note 5) | | | 39,441 | |
| Federal and state registration fees | | | 20,759 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Trustees’ fees and expenses | | | 10,078 | |
| Reports to shareholders | | | 7,511 | |
| Legal fees | | | 1,168 | |
| Other expenses | | | 10,517 | |
| Total expenses | | | 741,472 | |
| NET INVESTMENT INCOME | | $ | 633,446 | |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized gain on investments | | $ | 2,909,617 | |
| Net change in unrealized appreciation/depreciation on investments | | | (28,076,970 | ) |
| Net loss on investments | | | (25,167,353 | ) |
| NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | (24,533,907 | ) |
(1) | Net of foreign taxes withheld of $6,960. |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
(This Page Intentionally Left Blank.)
| STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income | | $ | 633,446 | | | $ | 1,056,994 | |
| Net realized gain on investments | | | 2,909,617 | | | | 12,617,156 | |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | (28,076,970 | ) | | | (22,730,488 | ) |
| Net decrease in net assets resulting from operations | | | (24,533,907 | ) | | | (9,056,338 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (7,452,661 | ) | | | (1,276,583 | ) |
| Distributable earnings – Institutional Class | | | (1,876,496 | ) | | | (587,596 | ) |
| Total distributions | | | (9,329,157 | ) | | | (1,864,179 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 1,374,348 | | | | 21,043,349 | |
| Proceeds from shares subscribed – Institutional Class | | | 2,310,513 | | | | 13,669,099 | |
| Dividends reinvested – Investor Class | | | 7,283,861 | | | | 1,243,912 | |
| Dividends reinvested – Institutional Class | | | 1,825,197 | | | | 549,827 | |
| Cost of shares redeemed – Investor Class | | | (15,578,967 | ) | | | (60,100,417 | ) |
| Cost of shares redeemed – Institutional Class | | | (7,209,698 | ) | | | (24,017,634 | ) |
| Net decrease in net assets derived | | | | | | | | |
| from capital share transactions | | | (9,994,746 | ) | | | (47,611,864 | ) |
| TOTAL DECREASE IN NET ASSETS | | | (43,857,810 | ) | | | (58,532,381 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 113,575,002 | | | | 172,107,383 | |
| End of period | | $ | 69,717,192 | | | $ | 113,575,002 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 51,785 | | | | 685,704 | |
| Shares sold – Institutional Class | | | 138,732 | | | | 758,917 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 274,193 | | | | 39,265 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 118,272 | | | | 29,680 | |
| Shares redeemed – Investor Class | | | (613,875 | ) | | | (1,998,475 | ) |
| Shares redeemed – Institutional Class | | | (497,039 | ) | | | (1,345,808 | ) |
| Net decrease in shares outstanding | | | (527,932 | ) | | | (1,830,717 | ) |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 29.47 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.16 | (1) |
| Net realized and unrealized gains (losses) on investments | | | (6.89 | ) |
| Total from investment operations | | | (6.73 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.19 | ) |
| Dividends from net realized gains | | | (2.16 | ) |
| Total distributions | | | (2.35 | ) |
| Net asset value, end of period | | $ | 20.39 | |
| | | | | |
| TOTAL RETURN | | | -24.64 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 58.75 | |
| Ratio of expenses to average net assets | | | 1.61 | %(4) |
| Ratio of net investment income to average net assets | | | 1.25 | %(4) |
Portfolio turnover rate(5) | | | 32 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 31.52 | | | $ | 17.46 | | | $ | 21.60 | | | $ | 21.96 | | | $ | 26.02 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.22 | (1) | | | 0.25 | (1) | | | 0.16 | (1) | | | 0.10 | (1) | | | 0.03 | |
| | (1.96 | ) | | | 14.01 | | | | (3.55 | ) | | | 0.93 | | | | (2.12 | ) |
| | (1.74 | ) | | | 14.26 | | | | (3.39 | ) | | | 1.03 | | | | (2.09 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.22 | ) | | | (0.20 | ) | | | (0.09 | ) | | | (0.07 | ) | | | 0.00 | (2) |
| | (0.09 | ) | | | — | | | | (0.66 | ) | | | (1.32 | ) | | | (1.97 | ) |
| | (0.31 | ) | | | (0.20 | ) | | | (0.75 | ) | | | (1.39 | ) | | | (1.97 | ) |
| $ | 29.47 | | | $ | 31.52 | | | $ | 17.46 | | | $ | 21.60 | | | $ | 21.96 | |
| | | | | | | | | | | | | | | | | | | |
| | -5.60 | % | | | 82.20 | % | | | -16.37 | % | | | 5.27 | % | | | -8.79 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 93.40 | | | $ | 140.03 | | | $ | 54.96 | | | $ | 89.36 | | | $ | 122.00 | |
| | 1.59 | % | | | 1.58 | % | | | 1.65 | % | | | 1.58 | % | | | 1.54 | % |
| | 0.72 | % | | | 0.90 | % | | | 0.96 | % | | | 0.47 | % | | | 0.11 | % |
| | 27 | % | | | 28 | % | | | 75 | % | | | 46 | % | | | 28 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 17.24 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.12 | (1) |
| Net realized and unrealized gains (losses) on investments | | | (4.00 | ) |
| Total from investment operations | | | (3.88 | ) |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.30 | ) |
| Dividends from net realized gains | | | (1.27 | ) |
| Total distributions | | | (1.57 | ) |
| Net asset value, end of period | | $ | 11.79 | |
| | | | | |
| TOTAL RETURN | | | -24.51 | %(2) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 10.97 | |
| Ratio of expenses to average net assets | | | 1.26 | %(3) |
| Ratio of net investment income to average net assets | | | 1.63 | %(3) |
Portfolio turnover rate(4) | | | 32 | %(2) |
(1) | Calculated using the average shares outstanding method. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 18.57 | | | $ | 10.37 | | | $ | 12.92 | | | $ | 13.28 | | | $ | 15.69 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.20 | (1) | | | 0.21 | (1) | | | 0.13 | (1) | | | 0.10 | (1) | | | 0.07 | |
| | (1.14 | ) | | | 8.26 | | | | (2.10 | ) | | | 0.54 | | | | (1.27 | ) |
| | (0.94 | ) | | | 8.47 | | | | (1.97 | ) | | | 0.64 | | | | (1.20 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | (0.34 | ) | | | (0.27 | ) | | | (0.19 | ) | | | (0.18 | ) | | | (0.02 | ) |
| | (0.05 | ) | | | — | | | | (0.39 | ) | | | (0.82 | ) | | | (1.19 | ) |
| | (0.39 | ) | | | (0.27 | ) | | | (0.58 | ) | | | (1.00 | ) | | | (1.21 | ) |
| $ | 17.24 | | | $ | 18.57 | | | $ | 10.37 | | | $ | 12.92 | | | $ | 13.28 | |
| | | | | | | | | | | | | | | | | | | |
| | -5.21 | % | | | 82.88 | % | | | -16.05 | % | | | 5.57 | % | | | -8.42 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 20.17 | | | $ | 32.08 | | | $ | 10.61 | | | $ | 20.74 | | | $ | 35.66 | |
| | 1.22 | % | | | 1.20 | % | | | 1.29 | % | | | 1.23 | % | | | 1.15 | % |
| | 1.13 | % | | | 1.31 | % | | | 1.27 | % | | | 0.84 | % | | | 0.51 | % |
| | 27 | % | | | 28 | % | | | 75 | % | | | 46 | % | | | 28 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Small Cap Financial Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is capital appreciation. The Fund is a non-diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| j). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
| | |
| | In March 2020, FASB issued Accounting Standards Update 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The main objective of the new guidance was to provide relief to companies that would be impacted by the expected change in benchmark interest rates at the end of 2021, when participating banks would no longer be required to submit London Interbank Offered Rate (“LIBOR”) quotes by the UK Financial Conduct Authority. The new guidance allows companies to account for contract modifications as a continuance of the existing contract without additional analysis, provided that the only change to existing contracts is a change to an approved benchmark interest rate. In addition, derivative contracts that qualified for hedge accounting prior to contract modification will be allowed to continue to receive such treatment even if critical terms change due to a change in the benchmark interest rate. For new and existing contracts, the Fund may elect to apply the amendments as of March 12, 2020 through December 31, 2022. See Note 9 for more information. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities |
| NOTES TO THE FINANCIAL STATEMENTS |
| | exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are
| HENNESSY FUNDS | 1-800-966-4354 | |
numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $28,937,029 and $47,542,439, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.90%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
| NOTES TO THE FINANCIAL STATEMENTS |
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain
| HENNESSY FUNDS | 1-800-966-4354 | |
general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 88,473,838 | |
| | Gross tax unrealized appreciation | | $ | 29,900,101 | |
| | Gross tax unrealized depreciation | | | (3,954,437 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | 25,945,664 | |
| | Undistributed ordinary income | | $ | 252,167 | |
| | Undistributed long-term capital gains | | | 8,333,428 | |
| | Total distributable earnings | | $ | 8,585,595 | |
| | Other accumulated gain/(loss) | | $ | — | |
| | Total accumulated gain/(loss) | | $ | 34,531,259 | |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 995,722 | | | $ | 1,378,796 | |
| | Long-term capital gains | | | 8,333,435 | | | | 485,383 | |
| | Total distributions | | $ | 9,329,157 | | | $ | 1,864,179 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
| NOTES TO THE FINANCIAL STATEMENTS |
9). LIBOR TRANSITION
The Fund invests in securities of financial institutions that may be involved in financings based on, among other floating rates, LIBOR. Determined by the ICE Benchmark Administration, LIBOR is an average interest rate that banks charge one another for the use of short-term money. In 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced plans to phase out the use of LIBOR by the end of 2021. Most LIBOR settings are no longer being published as of December 31, 2021, and the FCA and ICE Benchmark Administrator have announced that a majority of U.S. dollar LIBOR settings will cease publication after June 30, 2023. The U.S. Federal Reserve has begun publishing the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR. Other regulators and industry groups around the world have announced or begun publishing proposed alternative reference rates for other currencies, but global consensus is lacking, and the process for amending many existing contracts or instruments to transition away from LIBOR remains unclear. Uncertainty related to the liquidity impact of the change in reference rates and how to appropriately adjust these rates at the time of transition may lead to increased volatility and illiquidity in markets tied to LIBOR, reduce the value of LIBOR-related instruments, and reduce the effectiveness of hedging strategies, which could adversely affect the Fund’s performance. Moreover, the risks associated with this discontinuation and transition could be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner. Accordingly, it is difficult to predict the full impact of the transition away from LIBOR on the Fund until new reference rates and fallbacks for both legacy and new instruments and contracts are commercially accepted and market practices become settled.
10). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
11). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $ 753.60 | $14.12 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,033.90 | $16.37 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $ 754.90 | $11.06 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,037.40 | $12.84 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.61% for Investor Class shares or 1.26% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 100.00%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 0.00%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
| | | |
| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
| | | |
| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
| | | |
| | (4) | A summary of the advisory agreement; |
| | | |
| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
| | | |
| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
| | | |
| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
| | | |
| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
| | | |
| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
| | | |
| | (3) | Whether economies of scale are recognized by the Fund; |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (4) | The costs and profitability of the Fund to the Advisor; |
| | | |
| | (5) | The performance of the Fund; and |
| | | |
| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
| | | | | |
| | | | (ii) | seeks best execution for the Fund’s portfolio; |
| | | | | |
| | | | (iii) | manages the use of soft dollars for the Fund; and |
| | | | | |
| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
| | | | |
| | | (c) | The Advisor monitors the liquidity of each Fund. |
| | | | |
| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
| | | | |
| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
| | | | |
| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
| | | | |
| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
| | | | |
| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
| | | | |
| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
| | | | |
| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
| | | | |
| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
| | | | |
| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
| | | |
| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
| | | |
| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
| | | |
| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
| | | |
| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
(This Page Intentionally Left Blank.)
For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL REPORT
APRIL 30, 2023
HENNESSY TECHNOLOGY FUND
Investor Class HTECX
Institutional Class HTCIX
www.hennessyfunds.com | 1-800-966-4354
(This Page Intentionally Left Blank.)
Contents
| Letter to Shareholders | | 2 |
| Performance Overview | | 4 |
| Financial Statements | | |
| Schedule of Investments | | 5 |
| Statement of Assets and Liabilities | | 9 |
| Statement of Operations | | 10 |
| Statements of Changes in Net Assets | | 11 |
| Financial Highlights | | 12 |
| Notes to the Financial Statements | | 16 |
| Expense Example | | 24 |
| Proxy Voting Policy and Proxy Voting Records | | 26 |
| Availability of Quarterly Portfolio Schedule | | 26 |
| Federal Tax Distribution Information | | 26 |
| Important Notice Regarding Delivery of Shareholder Documents | | 26 |
| Electronic Delivery | | 26 |
| Board Approval of Investment Advisory Agreement | | 27 |
| HENNESSY FUNDS | 1-800-966-4354 | |
May 2023
Dear Hennessy Funds Shareholder:
The past six months in the stock market have been dramatic, even tumultuous, especially for certain sectors within the broader market. For the six-month period ended April 30, 2023, the broader equity markets rose then dipped each month consistently until the last two months of the period: the S&P 500® Index was up 6% in November, down 6% in December, up 6% in January, down 2% in February, up 4% in March, and finally up again 2% in April, resulting in a positive total return of 8.63% for the entire period.1
These single digit moves in the broader market masked the more pronounced moves in specific sectors or industries, the worst of which was the Financial sector’s 10% drop in March 2023. Within the Financial sector, large cap banks plunged 25%, precipitated by the second and third largest bank failures in history, which occurred over one weekend in early March. Our long-tenured and experienced Portfolio Manager, Dave Ellison, observed that March felt like ten years crammed into just a few weeks. Conversely, the Technology and Communication Services sectors performed exceptionally well during the six-month period ended April 30, 2023, with total returns of 19% and 23%, respectively, rebounding from a dismal 2022.2
While various factors drove this disparity of returns, interest rate hikes and persistent inflation were the primary causes behind many of the movements, both positive and negative, in the market. High inflation and low unemployment drove the Federal Reserve to increase rates 10 consecutive times over 14 months from March 2022 through early May 2023, bringing its benchmark interest rate from 0.25% to 5.25%, its highest level in 16 years. As rates rose and debt security prices dropped, banks’ capital levels declined, and in a few extreme instances this caused depositors to rapidly withdraw funds from certain riskier banks, leading to solvency issues and failures. On the other hand, positive results for many Technology companies and continued strong consumer spending caused many investors to pivot back into Technology, one of the worst performing sectors of 2022 but one of the best so far in 2023. Finally, with a mild winter, reduction of geopolitical unease, and fears of softening demand globally, oil, natural gas, and other commodities saw a drop in prices, causing Energy company shares to retreat after an incredibly strong 2022.
We believe that the outlook for U.S. stocks remains positive, primarily because we believe that the Federal Reserve may be done, or close to done, raising rates. Inflation has shown signs of easing, creating a better environment for consumers as well as businesses. The unemployment rate remains near record lows, there are elevated levels of cash on the balance sheets of U.S. companies and in the pockets of many consumers and investors, and there is the prospect of a more dovish Federal Reserve in the second half of 2023. However, we are cautiously watching certain parts of the economy for continued signs of weakness, as the risk of recession remains a concern. While volatility and uncertainty may continue to impact the markets, we encourage investors to stay the course, maintain a diversified portfolio, and keep a long-term perspective.
Suffice it to say, volatility and disparity of returns were at elevated levels for much of the first six months of our fiscal year. We saw four of our funds post negative total returns, of which two were invested primarily in the Financial sector and two were driven by the drop in Energy stocks. Overall, 13 of our 17 funds posted positive total returns for the first half of the fiscal year.
Tumultuous times call for introspection, allowing us to reflect on who we are and on what makes a fund a Hennessy Fund. We are long-term investors in companies, not traders of stocks, and we strive for positive shareholder returns over a complete market
cycle. Our funds are run by a talented group of Portfolio Managers, the vast majority of whom have over 20 years of investment experience and who bring their unique perspective and expertise. All our Portfolio Managers are professionals dedicated to running their portfolios with adherence to well-defined investment criteria and with a long-term focus in mind. We have five internal Portfolio Managers and sixteen external Portfolio Managers through five separate sub-advisors. Their expertise vary from Financials, Energy, and Utilities to Japanese companies to ESG (Environmental, Social, and Governance) companies. Some have invested through Black Monday and the Stock Market Crash of 1987, while a couple have entered the industry only after the Financial Crisis of 2007/2008.
We have 11 domestic equity funds, three domestic hybrid (equity and income) funds, two international equity funds, and one domestic ETF, which was added to our line-up in December 2022. Among our domestic mutual funds, we have eight funds that may invest across all sectors and six that focus primarily on one sector, including Energy, Financials, Utilities, and Technology. Most of our portfolios are concentrated, differentiated from their benchmarks, and designed to mitigate downside risk. In fact, as of April 30, 2023, the number of stocks in each of our 17 funds ranged from 10 to 63, with a median of 30. Excluding our hybrid and index funds, the median average active share of our funds was an impressive 90%. Active share measures how different a fund is versus its benchmark, with 100% signifying that the fund and benchmark have no common investments. Finally, the downside capture ratio, which measures the relative performance of a fund versus its benchmark on negative performance days, averaged a respectable 89%, 95%, and 90% across our funds for the three-year, five-year, and ten-year periods ended April 30, 2023.
We thank you for your continued interest in the Hennessy Funds, and we are grateful for your trust. While we prefer to post only positive returns for our shareholders, we are pleased that many of the Hennessy Funds did just that during the unpredictable past six months. If you have any questions or would like to speak with us directly, please call us at (800) 966-4354.
Best regards,
| |
| |
|
| |
| Ryan C. Kelley, CFA |
| Chief Investment Officer, |
| Senior Vice President, and Portfolio Manager |
Past performance does not guarantee future results.
Mutual fund investing involves risk. Principal loss is possible.
The opinions expressed are those of Ryan C. Kelley and are subject to change, are not guaranteed, and should not be considered investment advice.
The S&P 500® Index is commonly used to measure the performance of U.S. stocks. This index is used herein for comparative purposes in accordance with SEC regulations. One cannot invest directly in an index. All returns are shown on a total return basis.
Please refer to the Schedule of Investments included in this report for additional portfolio information.
1 | S&P 500® Index monthly total returns: +5.59% in November 2022, -5.76% in December 2022, +6.28% in January 2023, -2.44% in February 2023, +3.67% in March 2023, and +1.56% in April 2023. |
2 | S&P 500® Financial Sector monthly total return: -9.55% in March 2023. KBW Bank Index monthly total return: -24.87% in March 2023. S&P 500® Information Technology sector total return: +18.88% for the six months ended April 30, 2023. S&P 500® Communication Services sector total return: +23.15% for the six months ended April 30, 2023. |
| HENNESSY FUNDS | 1-800-966-4354 | |
Performance Overview (Unaudited)
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED APRIL 30, 2023
| | Six | One | Five | Ten |
| | Months(1) | Year
| Years
| Years
|
| Hennessy Technology Fund – | | | | |
| Investor Class (HTECX) | 7.10% | -0.86% | 8.79% | 10.10% |
| Hennessy Technology Fund – | | | | |
| Institutional Class (HTCIX) | 7.27% | -0.61% | 9.07% | 10.40% |
| Nasdaq Composite Index | 11.80% | 0.02% | 12.60% | 15.09% |
S&P 500® Index | 8.63% | 2.66% | 11.45% | 12.20% |
| Expense ratios: | Gross 3.06%, Net 1.23%(2)(3) (Investor Class); |
| | Gross 2.73%, Net 0.98%(2)(3) (Institutional Class) |
(1) | Periods of less than one year are not annualized. |
(2) | The Fund’s investment advisor has contractually agreed to limit expenses until February 28, 2024. |
(3) | Certain service provider expenses will be voluntarily waived through July 31, 2025, at which time the arrangement will automatically terminate. In addition, the arrangement will not apply at any time the Fund’s net assets exceed $125 million. |
_______________
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. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.hennessyfunds.com.
The Nasdaq Composite Index is a broad-based capitalization-weighted index of all common stocks listed on The Nasdaq Stock Market LLC. The S&P 500® Index is a capitalization-weighted index that is designed to represent the broad domestic economy through changes in the aggregate market value of 500 stocks across all major industries. One cannot invest directly in an index. These indices are used for comparative purposes in accordance with Securities and Exchange Commission regulations.
Standard & Poor’s Financial Services is the source and owner of the S&P® and S&P 500® trademarks.
The expense ratios presented are from the most recent prospectus. The expense ratios for the current reporting period are available in the Financial Highlights section of this report.
| PERFORMANCE OVERVIEW/SCHEDULE OF INVESTMENTS |
Financial Statements
Schedule of Investments as of April 30, 2023 (Unaudited) |
HENNESSY TECHNOLOGY FUND
(% of Net Assets)
| TOP TEN HOLDINGS (EXCLUDING MONEY MARKET FUNDS) | % NET ASSETS |
| Meta Platforms, Inc. | 1.95% |
| Microsoft Corp. | 1.85% |
| Tower Semiconductor Ltd. | 1.84% |
| Apple, Inc. | 1.78% |
| Automatic Data Processing, Inc. | 1.78% |
| CommVault Systems, Inc. | 1.78% |
| Lam Research Corp. | 1.77% |
| Verra Mobility Corp. | 1.77% |
| Adobe, Inc. | 1.76% |
| Vontier Corp. | 1.75% |
Note: For presentation purposes, the Fund has grouped some of the industry categories. For purposes of categorizing securities for compliance with Section 8(b)(1) of the Investment Company Act of 1940, as amended, the Fund uses more specific industry classifications.
The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI, Inc. and Standard & Poor’s Financial Services LLC. It has been licensed for use by the Hennessy Funds.
| HENNESSY FUNDS | 1-800-966-4354 | |
| COMMON STOCKS – 97.78% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Communication Services – 3.67% | | | | | | | | | |
| Meta Platforms, Inc. (a) | | | 458 | | | $ | 110,066 | | | | 1.95 | % |
| Sciplay Corp. (a) | | | 5,702 | | | | 97,390 | | | | 1.72 | % |
| | | | | | | | 207,456 | | | | 3.67 | % |
| | | | | | | | | | | | | |
| Consumer Discretionary – 1.69% | | | | | | | | | | | | |
| MercadoLibre, Inc. (a) | | | 75 | | | | 95,812 | | | | 1.69 | % |
| | | | | | | | | | | | | |
| Industrials – 5.27% | | | | | | | | | | | | |
| Automatic Data Processing, Inc. | | | 457 | | | | 100,540 | | | | 1.78 | % |
| Paychex, Inc. | | | 887 | | | | 97,446 | | | | 1.72 | % |
| Verra Mobility Corp. (a) | | | 5,893 | | | | 99,886 | | | | 1.77 | % |
| | | | | | | | 297,872 | | | | 5.27 | % |
| | | | | | | | | | | | | |
| Information Technology – 87.15% | | | | | | | | | | | | |
| Accenture PLC, Class A (b) | | | 332 | | | | 93,056 | | | | 1.65 | % |
| Adobe, Inc. (a) | | | 263 | | | | 99,298 | | | | 1.76 | % |
| Apple, Inc. | | | 592 | | | | 100,451 | | | | 1.78 | % |
| Applied Materials, Inc. | | | 813 | | | | 91,893 | | | | 1.63 | % |
| Arrow Electronics, Inc. (a) | | | 821 | | | | 93,947 | | | | 1.66 | % |
| ASE Technology Holding Co. Ltd. – ADR (b) | | | 12,500 | | | | 85,750 | | | | 1.52 | % |
| ASML Holding NV – ADR (b) | | | 145 | | | | 92,345 | | | | 1.63 | % |
| Atlassian Corp. (a) | | | 595 | | | | 87,858 | | | | 1.55 | % |
| Autodesk, Inc. (a) | | | 480 | | | | 93,499 | | | | 1.65 | % |
| Avnet, Inc. | | | 2,211 | | | | 91,226 | | | | 1.61 | % |
| Broadcom, Inc. | | | 154 | | | | 96,481 | | | | 1.71 | % |
| Cadence Design Systems, Inc. (a) | | | 460 | | | | 96,347 | | | | 1.70 | % |
| CDW Corp. | | | 516 | | | | 87,508 | | | | 1.55 | % |
| Check Point Software Technologies Ltd. (a)(b) | | | 746 | | | | 95,011 | | | | 1.68 | % |
| CommVault Systems, Inc. (a) | | | 1,731 | | | | 100,865 | | | | 1.78 | % |
| Crowdstrike Holdings, Inc. (a) | | | 719 | | | | 86,316 | | | | 1.53 | % |
| DocuSign, Inc. (a) | | | 1,723 | | | | 85,185 | | | | 1.51 | % |
| DXC Technology Co. (a) | | | 3,943 | | | | 94,041 | | | | 1.66 | % |
| Enphase Energy, Inc. (a) | | | 492 | | | | 80,786 | | | | 1.43 | % |
| Extreme Networks, Inc. (a) | | | 5,220 | | | | 92,812 | | | | 1.64 | % |
| Fortinet, Inc. (a) | | | 1,487 | | | | 93,755 | | | | 1.66 | % |
| Gartner, Inc. (a) | | | 309 | | | | 93,460 | | | | 1.65 | % |
| Hackett Group, Inc. | | | 5,296 | | | | 98,294 | | | | 1.74 | % |
The accompanying notes are an integral part of these financial statements.
| COMMON STOCKS | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Information Technology (Continued) | | | | | | | | | |
| Hewlett Packard Enterprise Co. | | | 6,063 | | | $ | 86,822 | | | | 1.54 | % |
| Immersion Corp. | | | 11,433 | | | | 75,343 | | | | 1.33 | % |
| Jabil, Inc. | | | 1,145 | | | | 89,482 | | | | 1.58 | % |
| KLA Corp. | | | 247 | | | | 95,475 | | | | 1.69 | % |
| Kulicke & Soffa Industries, Inc. | | | 1,928 | | | | 91,888 | | | | 1.62 | % |
| Lam Research Corp. | | | 191 | | | | 100,099 | | | | 1.77 | % |
| Lattice Semiconductor Corp. (a) | | | 1,047 | | | | 83,446 | | | | 1.48 | % |
| MACOM Technology Solutions Holdings, Inc. (a) | | | 1,402 | | | | 81,793 | | | | 1.45 | % |
| MaxLinear, Inc. (a) | | | 2,844 | | | | 68,626 | | | | 1.21 | % |
| Microsoft Corp. | | | 340 | | | | 104,468 | | | | 1.85 | % |
| NetApp, Inc. | | | 1,545 | | | | 97,165 | | | | 1.72 | % |
| NXP Semiconductors NV (b) | | | 558 | | | | 91,367 | | | | 1.62 | % |
| Palo Alto Networks, Inc. (a) | | | 499 | | | | 91,048 | | | | 1.61 | % |
| Pure Storage, Inc. (a) | | | 3,854 | | | | 87,987 | | | | 1.56 | % |
| QUALCOMM, Inc. | | | 792 | | | | 92,506 | | | | 1.64 | % |
| RingCentral, Inc. – Class A (a) | | | 3,260 | | | | 89,846 | | | | 1.59 | % |
| Sanmina Corp. (a) | | | 1,673 | | | | 87,431 | | | | 1.55 | % |
| ScanSource, Inc. (a) | | | 3,282 | | | | 89,763 | | | | 1.59 | % |
| Semtech Corp. (a) | | | 4,457 | | | | 86,867 | | | | 1.54 | % |
| ServiceNow, Inc. (a) | | | 205 | | | | 94,181 | | | | 1.67 | % |
| Splunk, Inc. (a) | | | 1,055 | | | | 90,983 | | | | 1.61 | % |
| STMicroelectronics NV – ADR (b) | | | 1,879 | | | | 80,572 | | | | 1.42 | % |
| Taiwan Semiconductor Manufacturing Co. Ltd. – ADR (b) | | | 1,058 | | | | 89,189 | | | | 1.58 | % |
| Telefonaktiebolaget LM Ericsson – ADR (b) | | | 16,939 | | | | 92,995 | | | | 1.64 | % |
| Teradata Corp. (a) | | | 2,408 | | | | 93,214 | | | | 1.65 | % |
| Texas Instruments, Inc. | | | 517 | | | | 86,442 | | | | 1.53 | % |
| Tower Semiconductor Ltd. (a)(b) | | | 2,314 | | | | 104,142 | | | | 1.84 | % |
| Ultra Clean Holdings, Inc. (a) | | | 3,065 | | | | 87,475 | | | | 1.55 | % |
| United Microelectronics Corp. – ADR (b) | | | 11,341 | | | | 91,068 | | | | 1.61 | % |
| Vishay Intertechnology, Inc. | | | 4,475 | | | | 95,273 | | | | 1.68 | % |
| Vontier Corp. | | | 3,655 | | | | 99,160 | | | | 1.75 | % |
| | | | | | | | 4,926,300 | | | | 87.15 | % |
| | | | | | | | | | | | | |
| Total Common Stocks | | | | | | | | | | | | |
| (Cost $5,242,347) | | | | | | | 5,527,440 | | | | 97.78 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
| SHORT-TERM INVESTMENTS – 2.16% | | Number | | | | | | % of | |
| | | of Shares | | | Value | | | Net Assets | |
| Money Market Funds – 2.16% | | | | | | | | | |
| First American Government Obligations Fund, | | | | | | | | | |
| Institutional Class, 4.73% (c) | | | 122,094 | | | $ | 122,094 | | | | 2.16 | % |
| | | | | | | | | | | | | |
| Total Short-Term Investments | | | | | | | | | | | | |
| (Cost $122,094) | | | | | | | 122,094 | | | | 2.16 | % |
| | | | | | | | | | | | | |
| Total Investments | | | | | | | | | | | | |
| (Cost $5,364,441) – 99.94% | | | | | | | 5,649,534 | | | | 99.94 | % |
| Other Assets in Excess of Liabilities – 0.06% | | | | | | | 3,128 | | | | 0.06 | % |
| | | | | | | | | | | | | |
TOTAL NET ASSETS – 100.00% | | | | | | $ | 5,652,662 | | | | 100.00 | % |
Percentages are stated as a percent of net assets.
ADR – American Depositary Receipt
NV – Naamloze Vennootschap is a Dutch term for publicly traded companies.
PLC – Public Limited Company
| (a) | Non-income-producing security. |
| (b) | U.S.-traded security of a foreign corporation. |
| (c) | The rate listed is the fund’s seven-day yield as of April 30, 2023. |
Summary of Fair Value Exposure as of April 30, 2023
The following is a summary of the inputs used to value the Fund’s net assets as of April 30, 2023 (see Note 3 in the accompanying Notes to the Financial Statements):
| Common Stocks | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Communication Services | | $ | 207,456 | | | $ | — | | | $ | — | | | $ | 207,456 | |
| Consumer Discretionary | | | 95,812 | | | | — | | | | — | | | | 95,812 | |
| Industrials | | | 297,872 | | | | — | | | | — | | | | 297,872 | |
| Information Technology | | | 4,926,300 | | | | — | | | | — | | | | 4,926,300 | |
| Total Common Stocks | | $ | 5,527,440 | | | $ | — | | | $ | — | | | $ | 5,527,440 | |
| Short-Term Investments | | | | | | | | | | | | | | | | |
| Money Market Funds | | $ | 122,094 | | | $ | — | | | $ | — | | | $ | 122,094 | |
| Total Short-Term Investments | | $ | 122,094 | | | $ | — | | | $ | — | | | $ | 122,094 | |
| Total Investments | | $ | 5,649,534 | | | $ | — | | | $ | — | | | $ | 5,649,534 | |
The accompanying notes are an integral part of these financial statements.
| SCHEDULE OF INVESTMENTS/STATEMENT OF ASSETS AND LIABILITIES |
Financial Statements
Statement of Assets and Liabilities as of April 30, 2023 (Unaudited) |
| ASSETS: | | | |
| Investments in securities, at value (cost $5,364,441) | | $ | 5,649,534 | |
| Dividends and interest receivable | | | 1,192 | |
| Prepaid expenses and other assets | | | 16,773 | |
| Due from advisor | | | 4,442 | |
| Total assets | | | 5,671,941 | |
| | | | | |
| LIABILITIES: | | | | |
| Payable to auditor | | | 11,224 | |
| Accrued distribution fees | | | 681 | |
| Accrued service fees | | | 354 | |
| Accrued trustees fees | | | 4,885 | |
| Accrued expenses and other payables | | | 2,135 | |
| Total liabilities | | | 19,279 | |
| NET ASSETS | | $ | 5,652,662 | |
| | | | | |
| NET ASSETS CONSISTS OF: | | | | |
| Capital stock | | $ | 6,297,401 | |
| Accumulated deficit | | | (644,739 | ) |
| Total net assets | | $ | 5,652,662 | |
| | | | | |
| NET ASSETS: | | | | |
| Investor Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 4,116,021 | |
| Shares issued and outstanding | | | 259,692 | |
| Net asset value, offering price, and redemption price per share | | $ | 15.85 | |
| | | | | |
| Institutional Class | | | | |
| Shares authorized (no par value) | | Unlimited | |
| Net assets applicable to outstanding shares | | $ | 1,536,641 | |
| Shares issued and outstanding | | | 94,345 | |
| Net asset value, offering price, and redemption price per share | | $ | 16.29 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Statement of Operations for the six months ended April 30, 2023 (Unaudited) |
| INVESTMENT INCOME: | | | |
Dividend income(1) | | $ | 25,890 | |
| Interest income | | | 2,877 | |
| Total investment income | | | 28,767 | |
| | | | | |
| EXPENSES: | | | | |
| Investment advisory fees (See Note 5) | | | 20,952 | |
| Federal and state registration fees | | | 14,731 | |
| Compliance expense (See Note 5) | | | 11,844 | |
| Audit fees | | | 11,227 | |
| Trustees’ fees and expenses | | | 9,221 | |
| Administration, accounting, custody, and transfer agent fees (See Note 5) | | | 8,829 | |
| Reports to shareholders | | | 3,258 | |
| Distribution fees – Investor Class (See Note 5) | | | 3,128 | |
| Sub-transfer agent expenses – Investor Class (See Note 5) | | | 2,575 | |
| Sub-transfer agent expenses – Institutional Class (See Note 5) | | | 371 | |
| Service fees – Investor Class (See Note 5) | | | 2,085 | |
| Legal fees | | | 10 | |
| Other expenses | | | 2,353 | |
| Total expenses before waivers and reimbursements | | | 90,584 | |
| Service provider expense waiver (See Note 5) | | | (8,829 | ) |
| Expense reimbursement from advisor – Investor Class | | | (36,340 | ) |
| Expense reimbursement from advisor – Institutional Class | | | (12,455 | ) |
| Net expenses | | | 32,960 | |
| NET INVESTMENT LOSS | | $ | (4,193 | ) |
| | | | | |
| REALIZED AND UNREALIZED GAINS (LOSSES): | | | | |
| Net realized loss on investments | | $ | (22,243 | ) |
| Net change in unrealized appreciation/depreciation on investments | | | 402,962 | |
| Net increase on investments | | | 380,719 | |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 376,526 | |
(1) | Net of foreign taxes withheld and issuance fees of $1,168. |
The accompanying notes are an integral part of these financial statements.
| STATEMENT OF OPERATIONS/STATEMENTS OF CHANGES IN NET ASSETS |
Financial Statements
| Statements of Changes in Net Assets |
| | | Six Months Ended | | | | |
| | | April 30, 2023 | | | Year Ended | |
| | | (Unaudited) | | | October 31, 2022 | |
| OPERATIONS: | | | | | | |
| Net investment income (loss) | | $ | (4,193 | ) | | $ | 5,524 | |
| Net realized loss on investments | | | (22,243 | ) | | | (867,706 | ) |
| Net change in unrealized | | | | | | | | |
| appreciation/depreciation on investments | | | 402,962 | | | | (1,169,054 | ) |
| Net increase (decrease) in net | | | | | | | | |
| assets resulting from operations | | | 376,526 | | | | (2,031,236 | ) |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS: | | | | | | | | |
| Distributable earnings – Investor Class | | | (2,801 | ) | | | (1,498,176 | ) |
| Distributable earnings – Institutional Class | | | (6,430 | ) | | | (513,645 | ) |
| Total distributions | | | (9,231 | ) | | | (2,011,821 | ) |
| | | | | | | | | |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares subscribed – Investor Class | | | 108,229 | | | | 265,541 | |
| Proceeds from shares subscribed – Institutional Class | | | 77,833 | | | | 89,997 | |
| Dividends reinvested – Investor Class | | | 2,743 | | | | 1,465,101 | |
| Dividends reinvested – Institutional Class | | | 6,430 | | | | 513,645 | |
| Cost of shares redeemed – Investor Class | | | (261,526 | ) | | | (779,866 | ) |
| Cost of shares redeemed – Institutional Class | | | (24,599 | ) | | | (262,162 | ) |
| Net increase (decrease) in net assets derived | | | | | | | | |
| from capital share transactions | | | (90,890 | ) | | | 1,292,256 | |
| TOTAL INCREASE (DECREASE) IN NET ASSETS | | | 276,405 | | | | (2,750,801 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| Beginning of period | | | 5,376,257 | | | | 8,127,058 | |
| End of period | | $ | 5,652,662 | | | $ | 5,376,257 | |
| | | | | | | | | |
| CHANGES IN SHARES OUTSTANDING: | | | | | | | | |
| Shares sold – Investor Class | | | 6,802 | | | | 16,191 | |
| Shares sold – Institutional Class | | | 4,611 | | | | 5,427 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Investor Class | | | 190 | | | | 73,365 | |
| Shares issued to holders as reinvestment | | | | | | | | |
| of dividends – Institutional Class | | | 433 | | | | 25,019 | |
| Shares redeemed – Investor Class | | | (16,587 | ) | | | (45,743 | ) |
| Shares redeemed – Institutional Class | | | (1,592 | ) | | | (14,199 | ) |
| Net increase (decrease) in shares outstanding | | | (6,143 | ) | | | 60,060 | |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Investor Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 14.81 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income (loss) | | | (0.02 | )(1) |
| Net realized and unrealized gains (losses) on investments | | | 1.07 | |
| Total from investment operations | | | 1.05 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.01 | ) |
| Dividends from net realized gains | | | — | |
| Total distributions | | | (0.01 | ) |
| Net asset value, end of period | | $ | 15.85 | |
| | | | | |
| TOTAL RETURN | | | 7.10 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 4.12 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 3.29 | %(4) |
| After expense reimbursement | | | 1.23 | %(4)(5) |
| Ratio of net investment income (loss) to average net assets: | | | | |
| Before expense reimbursement | | | (2.27 | )%(4) |
| After expense reimbursement | | | (0.21 | )%(4) |
Portfolio turnover rate(6) | | | 53 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(6) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INVESTOR CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 26.89 | | | $ | 20.50 | | | $ | 18.90 | | | $ | 18.04 | | | $ | 18.46 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.00 | (1)(2) | | | (0.02 | )(1) | | | 0.02 | (1) | | | (0.03 | )(1) | | | (0.05 | ) |
| | (5.38 | ) | | | 8.82 | | | | 2.10 | | | | 3.15 | | | | 1.26 | |
| | (5.38 | ) | | | 8.80 | | | | 2.12 | | | | 3.12 | | | | 1.21 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | — | | | | (0.04 | ) | | | — | | | | — | | | | — | |
| | (6.70 | ) | | | (2.37 | ) | | | (0.52 | ) | | | (2.26 | ) | | | (1.63 | ) |
| | (6.70 | ) | | | (2.41 | ) | | | (0.52 | ) | | | (2.26 | ) | | | (1.63 | ) |
| $ | 14.81 | | | $ | 26.89 | | | $ | 20.50 | | | $ | 18.90 | | | $ | 18.04 | |
| | | | | | | | | | | | | | | | | | | |
| | -26.44 | % | | | 45.11 | % | | | 11.42 | % | | | 20.47 | % | | | 7.25 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 3.99 | | | $ | 6.06 | | | $ | 4.26 | | | $ | 3.89 | | | $ | 3.31 | |
| | | | | | | | | | | | | | | | | | | |
| | 3.06 | % | | | 2.79 | % | | | 3.45 | % | | | 3.84 | % | | | 3.70 | % |
| | 1.23 | %(5) | | | 1.23 | %(5) | | | 1.23 | %(5) | | | 1.23 | % | | | 1.23 | % |
| | | | | | | | | | | | | | | | | | | |
| | (1.81 | )% | | | (1.64 | )% | | | (2.12 | )% | | | (2.80 | )% | | | (2.83 | )% |
| | 0.02 | % | | | (0.08 | )% | | | 0.10 | % | | | (0.19 | )% | | | (0.36 | )% |
| | 151 | % | | | 200 | % | | | 192 | % | | | 185 | % | | | 225 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
For an Institutional Class share outstanding throughout each period
| | | Six Months Ended | |
| | | April 30, 2023 | |
| | | (Unaudited) | |
| PER SHARE DATA: | | | |
| Net asset value, beginning of period | | $ | 15.26 | |
| | | | | |
| Income from investment operations: | | | | |
| Net investment income | | | 0.00 | (1)(2) |
| Net realized and unrealized gains (losses) on investments | | | 1.10 | |
| Total from investment operations | | | 1.10 | |
| | | | | |
| Less distributions: | | | | |
| Dividends from net investment income | | | (0.07 | ) |
| Dividends from net realized gains | | | — | |
| Total distributions | | | (0.07 | ) |
| Net asset value, end of period | | $ | 16.29 | |
| | | | | |
| TOTAL RETURN | | | 7.27 | %(3) |
| | | | | |
| SUPPLEMENTAL DATA AND RATIOS: | | | | |
| Net assets, end of period (millions) | | $ | 1.54 | |
| Ratio of expenses to average net assets: | | | | |
| Before expense reimbursement | | | 2.96 | %(4) |
| After expense reimbursement | | | 0.98 | %(4)(5) |
| Ratio of net investment income (loss) to average net assets: | | | | |
| Before expense reimbursement | | | (1.94 | )%(4) |
| After expense reimbursement | | | 0.04 | %(4) |
Portfolio turnover rate(6) | | | 53 | %(3) |
(1) | Calculated using the average shares outstanding method. |
(2) | Amount is between $(0.005) and $0.005 |
(3) | Not annualized. |
(4) | Annualized. |
(5) | Certain service provider expenses were voluntarily waived during the fiscal period. |
(6) | Calculated on the basis of the Fund as a whole. |
The accompanying notes are an integral part of these financial statements.
| FINANCIAL HIGHLIGHTS — INSTITUTIONAL CLASS |
| Year Ended October 31, | |
| 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | |
| | | | | | | | | | | | | | |
| $ | 27.65 | | | $ | 21.08 | | | $ | 19.40 | | | $ | 18.47 | | | $ | 18.85 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 0.05 | (1) | | | 0.05 | (1) | | | 0.07 | (1) | | | 0.01 | (1) | | | 0.01 | |
| | (5.55 | ) | | | 9.06 | | | | 2.15 | | | | 3.23 | | | | 1.28 | |
| | (5.50 | ) | | | 9.11 | | | | 2.22 | | | | 3.24 | | | | 1.29 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | — | | | | (0.11 | ) | | | (0.01 | ) | | | — | | | | — | |
| | (6.89 | ) | | | (2.43 | ) | | | (0.53 | ) | | | (2.31 | ) | | | (1.67 | ) |
| | (6.89 | ) | | | (2.54 | ) | | | (0.54 | ) | | | (2.31 | ) | | | (1.67 | ) |
| $ | 15.26 | | | $ | 27.65 | | | $ | 21.08 | | | $ | 19.40 | | | $ | 18.47 | |
| | | | | | | | | | | | | | | | | | | |
| | -26.28 | % | | | 45.49 | % | | | 11.67 | % | | | 20.77 | % | | | 7.54 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| $ | 1.39 | | | $ | 2.06 | | | $ | 1.47 | | | $ | 1.34 | | | $ | 1.09 | |
| | | | | | | | | | | | | | | | | | | |
| | 2.73 | % | | | 2.44 | % | | | 3.08 | % | | | 3.47 | % | | | 3.27 | % |
| | 0.98 | %(5) | | | 0.98 | %(5) | | | 0.98 | %(5) | | | 0.98 | % | | | 0.98 | % |
| | | | | | | | | | | | | | | | | | | |
| | (1.48 | )% | | | (1.29 | )% | | | (1.74 | )% | | | (2.43 | )% | | | (2.41 | )% |
| | 0.27 | % | | | 0.17 | % | | | 0.36 | % | | | 0.06 | % | | | (0.12 | )% |
| | 151 | % | | | 200 | % | | | 192 | % | | | 185 | % | | | 225 | % |
The accompanying notes are an integral part of these financial statements.
| HENNESSY FUNDS | 1-800-966-4354 | |
Financial Statements
Notes to the Financial Statements April 30, 2023 (Unaudited) |
1). ORGANIZATION
The Hennessy Technology Fund (the “Fund”) is a series of Hennessy Funds Trust (the “Trust”), which was organized as a Delaware statutory trust on September 17, 1992. The Fund is an open-end management investment company registered under the Investment Company Act of 1940, as amended. The investment objective of the Fund is long-term capital appreciation. The Fund is a diversified fund.
The Fund offers Investor Class and Institutional Class shares. Each class of shares differs principally in its respective 12b-1 distribution and service, shareholder servicing, and sub-transfer agent expenses. There are no sales charges. Each class has identical rights to earnings, assets, and voting privileges, except for class-specific expenses and exclusive rights to vote on matters affecting only one class.
As an investment company, the Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.”
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of the financial statements. These policies conform to U.S. generally accepted accounting principles (“GAAP”).
| a). | Securities Valuation – All investments in securities are valued in accordance with the Fund’s valuation policies and procedures, as described in Note 3. |
| | |
| b). | Federal Income Taxes – The Fund has elected to be taxed as a regulated investment company and intends to distribute substantially all of its taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. As a result, the Fund has made no provision for federal income taxes or excise taxes. Net investment income/loss and realized gains/losses for federal income tax purposes may differ from those reported in the financial statements because of temporary book-basis and tax-basis differences. Temporary differences are primarily the result of the treatment of wash sales for tax reporting purposes. The Fund recognizes interest and penalties related to income tax benefits, if any, in the Statement of Operations as an income tax expense. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income to shareholders for tax purposes. The Fund may utilize equalization accounting for tax purposes and designate earnings and profits, including net realized gains distributed to shareholders on redemption of shares, as part of the dividends paid deduction for income tax purposes. |
| | |
| c). | Accounting for Uncertainty in Income Taxes – The Fund has accounting policies regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The tax returns of the Fund for the prior three fiscal years are open for examination. The Fund has reviewed all open tax years in major tax jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund’s major tax jurisdictions are U.S. federal and Delaware. |
| NOTES TO THE FINANCIAL STATEMENTS |
| d). | Income and Expenses – Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund. Interest income, which includes the amortization of premium and accretion of discount, is recognized on an accrual basis. Market discounts, original issue discounts, and market premiums on debt securities are accreted or amortized to interest income over the life of a security with a corresponding increase or decrease, as applicable, in the cost basis of such security using the yield-to-maturity method or, where applicable, the first call date of the security. Other non-cash dividends are recognized as investment income at the fair value of the property received. The Fund is charged for those expenses that are directly attributable to its portfolio, such as advisory, administration, and certain shareholder service fees. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains/losses on investments are allocated to each class of shares based on such class’s net assets. |
| | |
| e). | Distributions to Shareholders – Dividends from net investment income for the Fund, if any, are declared and paid annually, usually in December. Distributions of net realized capital gains, if any, are declared and paid annually, usually in December. |
| | |
| f). | Security Transactions – Investment and shareholder transactions are recorded on the trade date. The Fund determines the realized gain/loss from an investment transaction by comparing the original cost of the security lot sold with the net sale proceeds. Discounts and premiums on securities purchased are accreted or amortized, respectively, over the life of each such security. |
| | |
| g). | Use of Estimates – Preparing financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported change in net assets during the reporting period. Actual results could differ from those estimates. |
| | |
| h). | Share Valuation – The net asset value (“NAV”) per share of the Fund is calculated by dividing (i) the total value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by (ii) the total number of Fund shares outstanding, rounded to the nearest $0.01. Fund shares are not priced on days the New York Stock Exchange is closed for trading. The offering and redemption price per share for the Fund is equal to the Fund’s NAV per share. |
| | |
| i). | Illiquid Securities – Pursuant to Rule 22e-4 under the 1940 Act, the Fund has adopted a Liquidity Risk Management Program (the “Liquidity Program”). The Liquidity Program requires, among other things, that the Fund limit its illiquid investments to no more than 15% of its net assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of by the Fund in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. |
| | |
| j). | Recent Accounting Pronouncements and Regulatory Updates – In October 2020, the Securities and Exchange Commission (the “SEC”) adopted new regulations under the 1940 Act governing the use of derivatives by registered investment companies (“Rule 18f-4”). Rule 18f-4 imposes limits on the amount of derivatives a fund can enter into, generally eliminates the asset segregation framework used by funds to comply with Section 18 of the 1940 Act, and requires funds whose use of derivatives is greater than a limited specified amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager. The Fund does not utilize derivatives and therefore has not adopted a derivatives risk management program. |
| HENNESSY FUNDS | 1-800-966-4354 | |
| | In December 2020, the SEC adopted a new rule under the 1940 Act providing a framework for fund valuation practices (“Rule 2a-5”). Rule 2a-5 establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Rule 2a-5 permits fund boards to designate certain parties to perform fair value determinations, subject to board oversight and certain other conditions. Rule 2a-5 also defines when market quotations are “readily available” for purposes of the 1940 Act and the threshold for determining whether a fund must fair value a security. In connection with Rule 2a-5, the SEC also adopted related recordkeeping requirements. The Fund has designated Hennessy Advisors, Inc., the Fund’s investment advisor (the “Advisor”), as its valuation designee under Rule 2a-5. |
3). SECURITIES VALUATION
The Fund follows its valuation policies and procedures in determining its NAV and, in preparing these financial statements, the fair value accounting standards that establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | Level 1 – | Unadjusted, quoted prices in active markets for identical instruments that the Fund has the ability to access at the date of measurement. |
| | | |
| | Level 2 – | Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar instruments, quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets, such as interest rates, prepayment speeds, credit risk curves, default rates, and similar data). |
| | | |
| | Level 3 – | Significant unobservable inputs (including the Fund’s own assumptions about what market participants would use to price the asset or liability based on the best available information) when observable inputs are unavailable. |
The following is a description of the valuation techniques applied to the Fund’s major categories of assets and liabilities on a recurring basis:
| | Equity Securities – Equity securities, including common stocks, preferred stocks, foreign-issued common stocks, exchange-traded funds, closed-end mutual funds, partnerships, rights, and real estate investment trusts, that are traded on a securities exchange for which a last-quoted sales price is readily available generally are valued at the last sales price as reported by the primary exchange on which the securities are listed. Securities listed on The Nasdaq Stock Market (“Nasdaq”) generally are valued at the Nasdaq Official Closing Price, which may differ from the last sales price reported. Securities traded on a securities exchange for which a last-quoted sales price is not readily available generally are valued at the mean between the bid and ask prices. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified in Level 1 of the fair value hierarchy. Securities traded on foreign exchanges generally are not valued at the same time the Fund calculates its NAV because most foreign markets close well before such time. The earlier close of most foreign markets gives rise to the possibility that significant events, including broad market moves, may have occurred in the interim. In certain circumstances, it may be determined that a foreign security needs to be fair valued because it appears that the value of the security might have been materially affected |
| NOTES TO THE FINANCIAL STATEMENTS |
| | by events occurring after the close of the market in which the security is principally traded, but before the time the Fund calculates its NAV, such as by a development that affects an entire market or region (e.g., a weather-related event) or a potentially global development (e.g., a terrorist attack that may be expected to have an effect on investor expectations worldwide). |
| | |
| | Registered Investment Companies – Investments in open-end registered investment companies, commonly referred to as mutual funds, generally are priced at the ending NAV provided by the applicable mutual fund’s service agent and are classified in Level 1 of the fair value hierarchy. |
| | |
| | Debt Securities – Debt securities, including corporate bonds, asset-backed securities, mortgage-backed securities, municipal bonds, U.S. Treasuries, and U.S. government agency issues, are generally valued at market on the basis of valuations furnished by an independent pricing service that utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate observable market data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued primarily using dealer quotations. These securities are generally classified in Level 2 of the fair value hierarchy. |
| | |
| | Short-Term Securities – Short-term equity investments, including money market funds, are valued in the manner specified above for equity securities. Short-term debt investments with an original term to maturity of 60 days or less are valued at amortized cost, which approximates fair market value. If the original term to maturity of a short-term debt investment exceeds 60 days, then the values as of the 61st day prior to maturity are amortized. Amortized cost is not used if its use would be inappropriate due to credit or other impairments of the issuer, in which case the security’s fair value would be determined as described below. Short-term securities are generally classified in Level 1 or Level 2 of the fair value hierarchy depending on the inputs used and market activity levels for specific securities. |
If market quotations are not readily available or if a significant event has occurred that indicates the closing price of a security no longer represents the true value of that security, any security or other asset will be valued at its fair value in accordance with Rule 2a-5 under the 1940 Act as determined under the fair value procedures of the Advisor, subject to oversight by the Board of Trustees of the Fund (the “Board”). Fair value pricing determinations are made in good faith in accordance with these procedures. There are numerous criteria considered in determining a fair value of a security, such as the trading volume of a security and markets, the values of other similar securities, and news events with direct bearing on a security or markets. Fair value pricing results in an estimated price for a security that reflects the amount the Fund might reasonably expect to receive in a current sale. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy. The Advisor will regularly evaluate, with the assistance of the Valuation and Liquidity Committee, whether the Fund’s fair value pricing procedures continue to be appropriate in light of the specific circumstances of the Fund and the quality of prices obtained through their application of such procedures.
The fair value of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of
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relevant American Depositary Receipts or futures contracts. Using fair value pricing means that the Fund’s NAV reflects the affected portfolio securities’ values as determined by the Board or its designee, pursuant to the fair value pricing procedures adopted by the Board, instead of being determined by the market. Using a fair value pricing methodology to price a foreign security may result in a value that is different from such foreign security’s most recent closing price and from the value used by other investment companies to calculate their NAVs. Such securities are generally classified in Level 2 of the fair value hierarchy. Because the Fund may invest in foreign securities, the value of the Fund’s portfolio securities may change on days when a shareholder is unable to purchase or redeem Fund shares.
The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determinations. Various inputs are used to determine the value of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Details related to the fair value hierarchy of the Fund’s securities as of April 30, 2023, are included in the Schedule of Investments.
4). INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding government and short-term investments) for the Fund during the six months ended April 30, 2023, were $2,961,690 and $3,043,933, respectively.
There were no purchases or sales/maturities of long-term U.S. government securities for the Fund during the six months ended April 30, 2023.
5). INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Advisor provides the Fund with investment advisory services under an Investment Advisory Agreement. The Advisor furnishes all investment advice, office space, and facilities and most of the personnel needed by the Fund. As compensation for its services, the Advisor is entitled to a monthly fee from the Fund. The fee is based on the average daily net assets of the Fund at an annual rate of 0.74%. The net investment advisory fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Advisor has contractually agreed to limit total annual operating expenses to 0.98% of the Fund’s net assets for both Investor Class shares and Institutional Class shares (excluding all federal, state and local taxes, interest, brokerage commissions, 12b-1 fees, shareholder servicing fees payable to the Advisor, extraordinary items, and acquired fund fees and expenses and other costs incurred in connection with the purchase and sale of securities) through February 28, 2024.
For three years following the date on which expenses were waived or incurred, the Advisor may recoup waived or reimbursed expenses from the Fund if total operating expenses, including such recoupment, does not exceed the expense limitation in effect (i) at the time the Advisor waived or reimbursed such expenses and (ii) at the time the Advisor recoups such expenses. As of April 30, 2023, expenses subject to potential recovery for Investor Class and Institutional Class shares and the fiscal years in which they expire were as follows:
| | | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | |
| | | 2023
| 2024
| 2025
| 2026
| Total
|
| | Investor Class | $40,167 | $75,956 | $73,628 | $36,340 | $226,091 |
| | Institutional Class | $12,621 | $23,799 | $23,122 | $12,455 | $ 71,997 |
| NOTES TO THE FINANCIAL STATEMENTS |
The Advisor did not recoup expenses from the Fund during the six months ended April 30, 2023.
The Board has approved a Shareholder Servicing Agreement for Investor Class shares of the Fund, which compensates the Advisor for the non-investment advisory services it provides to the Fund. The Shareholder Servicing Agreement provides for a monthly fee paid to the Advisor at an annual rate of 0.10% of the average daily net assets of the Fund attributable to Investor Class shares. The shareholder service fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, that authorizes payments in connection with the distribution of Fund shares at an annual rate of up to 0.25% of the Fund’s average daily net assets attributable to Investor Class shares. Even though the authorized rate is up to 0.25%, the Fund is currently only using up to 0.15% of its average daily net assets attributable to Investor Class shares for such purpose. Amounts paid under the plan may be spent on any activities or expenses primarily intended to result in the sale of shares, including, but not limited to, advertising, shareholder account servicing, printing and mailing of prospectuses to other than current shareholders, printing and mailing of sales literature, and compensation for sales and marketing activities or to financial institutions and others, such as dealers and distributors. The distribution fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
The Fund has entered into agreements with various brokers, dealers, and financial intermediaries in connection with the sale of Fund shares. The agreements provide for periodic payments of sub-transfer agent expenses by the Fund to the brokers, dealers, and financial intermediaries for providing certain shareholder maintenance services. These shareholder services include the pre-processing and quality control of new accounts, shareholder correspondence, answering customer inquiries regarding account status, and facilitating shareholder telephone transactions. The sub-transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations.
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank Global Fund Services (“Fund Services”) provides the Fund with administrative, accounting, and transfer agent services. As administrator, Fund Services is responsible for activities such as (i) preparing various federal and state regulatory filings, reports, and returns for the Fund, (ii) preparing reports and materials to be supplied to the Board, (iii) monitoring the activities of the Fund’s custodian, transfer agent, and accountants, and (iv) coordinating the preparation and payment of the Fund’s expenses and reviewing the Fund’s expense accruals. U.S. Bank N.A., an affiliate of Fund Services, serves as the Fund’s custodian. The servicing agreements between the Trust, Fund Services, and U.S. Bank N.A. contain a fee schedule that is inclusive of administrative, accounting, custody, and transfer agent fees. The administrative, accounting, custody, and transfer agent fees expensed by the Fund during the six months ended April 30, 2023, are included in the Statement of Operations. Fund Services has voluntarily waived all or a portion of its fees for the Fund. The fees voluntarily waived by Fund Services during the six months ended April 30, 2023, are included in the Statement of Operations.
Quasar Distributors, LLC, a wholly owned broker-dealer subsidiary of Foreside Financial Group, LLC, acts as the Fund’s principal underwriter in a continuous public offering of Fund shares.
The officers of the Fund are affiliated with the Advisor. With the exception of the Chief Compliance Officer, such officers receive no compensation from the Fund for
| HENNESSY FUNDS | 1-800-966-4354 | |
serving in their respective roles. The Fund, along with the other funds in the Hennessy Funds family (collectively, the “Hennessy Funds”), makes reimbursement payments on an equal basis to the Advisor for a portion of the salary and benefits associated with the office of the Chief Compliance Officer. The compliance fees expensed by the Fund during the six months ended April 30, 2023, for reimbursement payments to the Advisor are included in the Statement of Operations.
6). GUARANTEES AND INDEMNIFICATIONS
Under the Hennessy Funds’ organizational documents, their officers and trustees are indemnified by the Hennessy Funds against certain liabilities arising out of the performance of their duties to the Hennessy Funds. Additionally, in the normal course of business, the Hennessy Funds enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
7). LINE OF CREDIT
The Fund has an uncommitted line of credit with the other Hennessy Funds in the amount of the lesser of (i) $100,000,000 or (ii) 33.33% of each Hennessy Fund’s net assets, or 30% for the Hennessy Gas Utility Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund and 10% for the Hennessy Balanced Fund. The line of credit is intended to provide any necessary short-term financing in connection with shareholder redemptions, subject to certain restrictions. The credit facility is with the Hennessy Funds’ custodian bank, U.S. Bank N.A. Borrowings under this arrangement bear interest at the bank’s prime rate and are secured by all of the Fund’s assets (as to its own borrowings only). During the six months ended April 30, 2023, the Fund did not have any borrowings outstanding under the line of credit.
8). FEDERAL TAX INFORMATION
As of October 31, 2022, the Fund’s most recent fiscal year end, the components of accumulated earnings (losses) for income tax purposes were as follows:
| | | | Investments | |
| | Cost of investments for tax purposes | | $ | 5,559,041 | |
| | Gross tax unrealized appreciation | | $ | 675,280 | |
| | Gross tax unrealized depreciation | | | (843,674 | ) |
| | Net tax unrealized appreciation/(depreciation) | | $ | (168,394 | ) |
| | Undistributed ordinary income | | $ | 9,231 | |
| | Undistributed long-term capital gains | | | — | |
| | Total distributable earnings | | $ | 9,231 | |
| | Other accumulated gain/(loss) | | $ | (852,871 | ) |
| | Total accumulated gain/(loss) | | $ | (1,012,034 | ) |
The difference between book-basis unrealized appreciation/depreciation and tax-basis unrealized appreciation/depreciation (as shown above) is attributable primarily to wash sales.
As of October 31, 2022, the Fund had no tax-basis capital losses to offset future capital gains.
As of October 31, 2022, the Fund did not defer, on a tax basis, any late-year ordinary losses. Late-year ordinary losses are net ordinary losses incurred after December 31, 2021, but within the taxable year, that are deemed to arise on the first day of the Fund’s next taxable year.
| NOTES TO THE FINANCIAL STATEMENTS |
During fiscal year 2023 (year to date) and fiscal year 2022, the tax character of distributions paid by the Fund was as follows:
| | | | Six Months Ended | | | Year Ended | |
| | | | April 30, 2023 | | | October 31, 2022 | |
| | Ordinary income(1) | | $ | 9,231 | | | $ | 1,183,102 | |
| | Long-term capital gains | | | — | | | | 828,719 | |
| | Total distributions | | $ | 9,231 | | | $ | 2,011,821 | |
| | | | | | | | | | |
| | (1) Ordinary income includes short-term capital gains. | | | | | | | | |
9). MARKET AND GEOPOLITICAL RISKS
The increasing interconnectivity between global economies and financial markets increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Securities in the Fund’s portfolios may underperform due to volatility in the banking sector, including bank failures, inflation (or expectations for inflation), increasing interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism, international conflicts, regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years may result in market volatility and may have long term effects on both the U.S. and global financial markets. It is not known how long such impacts, or any future impacts of other significant events described above, will or would last, but there could be a prolonged period of global economic slowdown, which may impact your Fund investment.
10). EVENTS SUBSEQUENT TO PERIOD END
Management has evaluated the Fund’s related events and transactions that occurred subsequent to April 30, 2023, through the date of issuance of the Fund’s financial statements. Management has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
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Expense Example (Unaudited)
April 30, 2023
As a shareholder of the Fund, you incur ongoing costs, including management fees, service fees, and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2022, through April 30, 2023.
Actual Expenses
In the table below, the first line under each of the “Investor Class” and “Institutional Class” headings provides information about actual account values and actual expenses for each share class. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales loads or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bank Global Fund Services, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, the Fund’s transfer agent charges a $15 fee. IRAs are charged a $15 annual maintenance fee (up to $30 maximum per shareholder for shareholders with multiple IRAs). The examples below include, but are not limited to, management, shareholder servicing, accounting, custody, and transfer agent fees. However, the examples below do not include portfolio trading commissions and related expenses.
Hypothetical Example for Comparison Purposes
In the table below, the second line under each of the “Investor Class” and “Institutional Class” headings provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio for each share class and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return for such share class. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second lines under “Investor Class” and “Institutional Class” are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
| | | | Expenses Paid |
| | Beginning | Ending | During Period(1) |
| | Account Value | Account Value | November 1, 2022 – |
| | November 1, 2022 | April 30, 2023
| April 30, 2023
|
| Investor Class | | | |
| Actual | $1,000.00 | $1,071.00 | $12.74 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,037.70 | $12.53 |
| | | | |
| Institutional Class | | | |
| Actual | $1,000.00 | $1,072.70 | $10.16 |
| Hypothetical (5% return before expenses) | $1,000.00 | $1,040.20 | $10.00 |
(1) | Expenses are equal to the Fund’s annualized expense ratio of 1.23% for Investor Class shares or 0.98% for Institutional Class shares, as applicable, multiplied by the average account value over the period, multiplied by 181/365 days (to reflect the half-year period). |
| HENNESSY FUNDS | 1-800-966-4354 | |
How to Obtain a Copy of the Fund’s Proxy
Voting Policy and Proxy Voting Records
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge (1) by calling 800-966-4354, (2) on the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-policy, or (3) on the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov. The Fund’s proxy voting record is available without charge on both the Hennessy Funds’ website at www.hennessyfunds.com/proxy-voting/voting-record and the SEC’s website at www.sec.gov no later than August 31 for the prior 12 months ending June 30.
Availability of Quarterly Portfolio Schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov or on request by calling 800-966-4354.
Federal Tax Distribution Information (Unaudited)
For fiscal year 2022, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 7.34%.
For corporate shareholders, the percent of ordinary income distributions that qualified for the corporate dividends received deduction for fiscal year 2022 was 5.48%.
The percentage of taxable ordinary income distributions that were designated as short-term capital gain distributions under Section 871(k)(2)(C) of the Internal Revenue Code of 1986, as amended, for the Fund was 100.00%.
Important Notice Regarding Delivery
of Shareholder Documents
To help keep the Fund’s costs as low as possible, we generally deliver a single copy of shareholder reports, proxy statements, and prospectuses to shareholders who share an address and have the same last name. This process does not apply to account statements. You may request an individual copy of a shareholder document at any time. If you would like to receive separate mailings of shareholder documents, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124, and individual delivery will begin within 30 days of your request. If your account is held through a financial institution or other intermediary, please contact such intermediary directly to request individual delivery.
Electronic Delivery
The Fund offers shareholders the option to receive account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery, please visit www.hennessyfunds.com/account. You may change your delivery preference at any time by visiting our website or calling U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
The Fund also offers shareholders the option to receive all notices, account statements, prospectuses, tax forms, and shareholder reports online. To sign up for eDelivery or change your delivery preference, please visit www.hennessyfunds.com/account.
To elect to receive paper copies of all future reports free of charge, please call U.S. Bank Global Fund Services at 800-261-6950 or 414-765-4124.
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| PROXY VOTING — BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
Board Approval of Investment Advisory
Agreement
At its meeting on March 7, 2023, the Board of Trustees of the Fund (the “Board,” and the members thereof, the “Trustees”) unanimously approved the continuation of the investment advisory agreement of the Fund with Hennessy Advisors, Inc. (the “Advisor”). As part of the process, the Trustees reviewed their fiduciary duties and the relevant factors for them to consider with respect to approving the advisory agreement. In addition, the Trustees who are not deemed “interested persons” (as defined by the Investment Company Act of 1940, as amended) of the Fund (the “Independent Trustees”) met in executive session to discuss the approval of the advisory agreement.
In advance of the meeting, the Advisor sent detailed information to the Trustees to assist them in their evaluation of the advisory agreement. This information included, but was not limited to, the following:
| | (1) | A memorandum from outside legal counsel that described the fiduciary duties of the Board with respect to approving the continuation of the advisory agreement and the relevant factors for consideration; |
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| | (2) | A memorandum from the Advisor that listed the factors relevant to the Board’s approval of the continuation of the advisory agreement and also referenced the documents that had been provided to help the Board assess each such factor; |
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| | (3) | The Advisor’s financial statements from its most recent Form 10-K and Form 10-Q; |
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| | (4) | A summary of the advisory agreement; |
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| | (5) | A recent Fund fact sheet, which included, among other things, Fund performance over various periods; |
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| | (6) | A description of the range of services provided by the Advisor and the distinction between the Advisor-provided services and the Sub-Advisor-provided services; |
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| | (7) | A peer expense comparison of the net expense ratio and investment advisory fee of the Fund; and |
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| | (8) | A memorandum from the Advisor regarding economies of scale. |
All of the factors discussed were considered as a whole by the Trustees, as well as by the Independent Trustees meeting in executive session. The Trustees viewed the relevant factors in their totality, with no single factor being the principal or determinative factor in the Trustees’ determination of whether to approve the continuation of the advisory agreement. The Trustees recognized that the management and fee arrangements for the Fund are the result of years of review and discussion between the Independent Trustees and the Advisor, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements and information received during the course of the year and in prior years.
Prior to approving the continuation of the advisory agreement, the Trustees, including the Independent Trustees in executive session, considered, among other items:
| | (1) | The nature and quality of the advisory services provided by the Advisor; |
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| | (2) | A comparison of the fees and expenses of the Fund to other similar funds; |
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| | (3) | Whether economies of scale are recognized by the Fund; |
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| | (4) | The costs and profitability of the Fund to the Advisor; |
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| | (5) | The performance of the Fund; and |
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| | (6) | Any benefits to the Advisor from serving as an investment advisor to the Fund (other than the advisory fee). |
The material considerations and determinations of the Trustees, including the Independent Trustees, were as follows:
| | (1) | The Trustees considered the services identified below that are provided by the Advisor. Based on this review and an assessment of the Advisor’s performance, the Trustees concluded that the Advisor provides high-quality services to the Fund, and they noted that their overall confidence in the Advisor was high. The Trustees also concluded that they were satisfied with the nature, extent, and quality of the advisory services provided to the Fund by the Advisor and that the nature and extent of the services provided by the Advisor were appropriate to assure that the Fund’s operations are conducted in compliance with applicable laws, rules, and regulations. |
| | | (a) | The Advisor acts as the portfolio manager for the Fund. In this capacity, the Advisor does the following: |
| | | | (i) | manages the composition of the Fund’s portfolio, including the purchase, retention, and disposition of portfolio securities in accordance with the Fund’s investment objectives, policies, and restrictions; |
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| | | | (ii) | seeks best execution for the Fund’s portfolio; |
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| | | | (iii) | manages the use of soft dollars for the Fund; and |
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| | | | (iv) | manages proxy voting for the Fund. |
| | | (b) | The Advisor performs a daily reconciliation of portfolio positions and cash for the Fund. |
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| | | (c) | The Advisor monitors the liquidity of each Fund. |
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| | | (d) | The Advisor monitors the Fund’s compliance with its investment objectives and restrictions and federal securities laws. |
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| | | (e) | The Advisor maintains a compliance program (including a code of ethics), conducts ongoing reviews of the compliance programs of the Fund’s service providers (including their codes of ethics, as appropriate), conducts on-site visits to the Fund’s service providers, as feasible, monitors incidents of abusive trading practices, reviews Fund expense accruals, payments, and fixed expense ratios, evaluates insurance providers for fidelity bond, D&O/E&O insurance, and cybersecurity insurance coverage, manages regulatory examination compliance and responses, conducts employee compliance training, reviews reports provided by service providers, and maintains books and records. |
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| | | (f) | The Advisor oversees service providers that provide accounting, administration, distribution, transfer agency, custodial, sales, marketing, public relations, audit, information technology, and legal services to the Fund. |
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| | | (g) | The Advisor maintains in-house marketing and distribution departments on behalf of the Fund. |
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
| | | (h) | The Advisor prepares or directs the preparation of all regulatory filings for the Fund, including writing and annually updating the Fund’s prospectus and related documents. |
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| | | (i) | For each annual report of the Fund, the Advisor prepares a written summary of the Fund’s performance during the most recent 12-month period. |
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| | | (j) | The Advisor oversees distribution of the Fund through third-party broker/dealers and independent financial institutions such as Charles Schwab, Inc., Fidelity, TD Ameritrade, and Pershing. The Advisor participates in “no transaction fee” (“NTF”) programs with these companies on behalf of the Fund, which allow customers to purchase the Fund through third-party distribution channels without paying a transaction fee. The Advisor compensates, in part, a number of these third-party providers of NTF programs out of its own revenues. |
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| | | (k) | The Advisor pays the incentive compensation of the Fund’s compliance officer and employs other staff, such as legal, marketing, national accounts, distribution, sales, administrative, and trading oversight personnel, as well as management executives. |
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| | | (l) | The Advisor provides a quarterly compliance certification to the Board. |
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| | | (m) | The Advisor prepares or reviews all Board materials, presents to and leads discussions with the Board, prepares or reviews all meeting minutes, and arranges for Board training and education. |
| | (2) | The Trustees compared the performance of the Fund to benchmark indices over various periods and noted that the Trustees review and discuss reports comparing the investment performance of the Fund to various indices at each quarterly Board meeting. Based on such information, the Trustees determined that the Advisor manages the Fund in a manner materially consistent with its stated investment objective and style. The Trustees concluded that the performance of the Fund over various periods warranted the continuation of the advisory agreement. |
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| | (3) | The Trustees reviewed the advisory fees and overall expense ratios of the Fund compared to other funds similar in asset size and investment objective to the Fund using data from Morningstar. As part of the discussion with management, the Trustees ensured that they understood and were comfortable with the criteria used to determine the mutual funds included in the Morningstar categories for purposes of the materials considered at the meeting. The Trustees determined that the advisory fee and overall expense ratio of the Fund falls within a reasonable range of the advisory fees and overall expense ratios of other comparable funds and concluded that they are reasonable and warranted continuation of the advisory agreement. |
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| | (4) | The Trustees also considered whether the Advisor was realizing economies of scale that should be shared with the Fund’s shareholders. The Trustees noted that many of the expenses incurred to manage the Fund were variable asset-based fees, so the Advisor would not realize material economies of scale relating to these expenses as the assets of the Fund increased. For example, third-party platform fees increase as the Fund’s assets grow. |
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| | (5) | The Trustees considered the profitability of the Advisor, including the impact of mutual fund platform fees on the Advisor’s profitability, and also considered the resources and revenues that the Advisor has put into managing and distributing the Fund. The Trustees then concluded that the profits of the Advisor are reasonable and not excessive when compared to profitability guidelines set forth in relevant court cases. |
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| | (6) | The Trustees considered the high level of professionalism and knowledge of the Advisor’s employees and concluded that this was beneficial to the Fund and its shareholders. |
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| | (7) | The Trustees considered any benefits to the Advisor from serving as an advisor to the Fund (other than the advisory fee). The Trustees noted that the Advisor may derive ancillary benefits from, by way of example, its association with the Fund in the form of proprietary and third-party research products and services received from broker-dealers that execute portfolio trades for the Fund. The Trustees determined that any such products and services have been used for legitimate purposes relating to the Fund by providing assistance in the investment decision-making process. The Trustees concluded that any additional benefits realized by the Advisor from its relationship with the Fund were reasonable, which was based on, among other things, the Trustees’ finding that the research, analytical, statistical, and other information and services provided by brokers are merely supplemental to the Advisor’s own efforts in the performance of its duties under the advisory agreement. |
After reviewing the materials and information provided at the meeting, as well as other information regularly provided at the Board’s quarterly meetings throughout the year regarding the quality of services provided by the Advisor, the performance of the Fund, expense information, brokerage commissions information, the adequacy and efficacy of the Advisor’s written policies and procedures, other regulatory compliance issues, trading information and related matters, and other factors that the Trustees deemed relevant, the Trustees, including the Independent Trustees, approved the continuation of the advisory agreement.
| BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT |
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For information, questions, or assistance, please call
The Hennessy Funds
800-966-4354 or 415-899-1555
INVESTMENT ADVISOR
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
ADMINISTRATOR,
TRANSFER AGENT,
DIVIDEND PAYING AGENT, &
SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
d/b/a U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
CUSTODIAN
U.S. Bank N.A.
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
TRUSTEES
Neil J. Hennessy
Robert T. Doyle
J. Dennis DeSousa
Doug Franklin
Claire Garvie
Gerald P. Richardson
COUNSEL
Foley & Lardner LLP
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5306
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
Two Liberty Place
50 South 16th Street, Suite 2900
Philadelphia, Pennsylvania 19102-2529
DISTRIBUTOR
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
www.hennessyfunds.com | 800-966-4354
This report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus.
