November 15, 2012

A Bullish Neil Hennessy Thinks Now Is the Time for Equities

Acquisition of FBR mutual funds shows his firm’s own belief in stocks; when interest rates rise, investors in fixed income will be 'killed'

At the start of an interview at Schwab Impact 2012 on Thursday, Neil Hennessy rephrased the opening question about his mutual fund complex’s late October acquisition of FBR funds. “Why buy an equity mutual funds” complex now? “The market is in very good shape,” he answered, “and has been in good shape," citing the year-to-date 14% rise in the S&P 500, and the strong earnings being posted by the S&P 500 companies.

However, with the continued “lack of clarity” on what will happen in Washington regarding taxes, healthcare and regulation, the chairman and CEO of Hennessy Fund Advisors (HNNA) believes that corporations are limited with what they can do with their cash. One option for what companies can do with their cash–to initiate or raise dividends–will be much less appealing should the tax rate on dividends rise if the Bush-era tax cuts are allowed to expire at year’s end. Another one of those options, however, is to make acquisitions. As with other American companies, that’s what Hennessy decided to do with FBR. Additional deals are possible for Hennessy (at left) as well. “I’ll look for more acquisitions on the equity side.”

While President Obama’s re-election means Obamacare is here to stay, he suspects that many smaller companies will decide to drop coverage of their employees and instead pay the fines that can be levied under the Affordable Care Act. On prospects for higher taxes, he suspects it’s a fool’s errand: “You won’t get to the rich; they’ll just stop moving their money” to avoid higher taxes.

There’s another reason Hennessy likes equities. Interest rates are going to go up, and investors who have flocked to fixed income “will be killed” when rates rise. That, he said, is when “they’ll go to equities.” Advisors, he suggested, have had to accede to clients’ need for perceived safety by allocating more to bonds, but when rates begin to rise, they’ll be able to nudge their clients back into equities, where the opportunities exist for growth.  

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