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Hennessy Funds’ Chief Sees Dow at 20,000, ‘Loves’ Japan

By James J. Green

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Neil Hennessy drives a Ford F-150 pickup. He likes to joke that his is the “biggest mutual fund complex on Redwood Boulevard in Novato.” That’s Novato, California. He “loves Japan.” He thinks the Dow industrials will hit 20,000 in two to three years, and with the yield on the DJIA at 2.2%, says, “I’m not going out on a limb here.”

Hennessy is also a firm believer in staying invested, even in difficult times. Investing success comes, he says, not from “timing the market; it’s time in the market.” In addition, he’s proud to say “I’m not an economist, but an economic realist.” And if he were elected President, the first thing he’d do would be to “take TVs out of congressional hearings.”

But don’t let the self-deprecating folksiness fool you. Hennessy has no pretensions but he is no simpleton, and while he’s quite engaging, he’s much more than glib. He was a broker for PaineWebber, registered his RIA firm in 1990 and launched his first mutual fund in 1996. He’s grown his fund complex steadily and surely over the years, and when the blood was in the streets during the financial crisis, he bought two mutual funds in Japan from SPARX. In Japan! In 2009!

In fact, he’s made seven mutual fund acquisitions over the years to grow his stable (including two additional funds in 2009), in most cases retaining the original managers as subadvisors. He can as easily and surely talk about the ways of the American consumer as he can the government strategy of Japanese Prime Minister Abe, and he has strong, very strong feelings on how to invest, and how not. “Buy quality” investments he says, don’t focus on the “micro,” and if you “trade on emotion, you’ll get killed.”

So what should investors in the U.S. know? In an interview during the Schwab Impact conference in Denver last week, Hennessy said that while we have a slowly growing economy, “productivity is up and corporate earnings are up.” While “trillions” of dollars still sit on the sidelines, “the market continues to grow.”

What about all the money being hoarded by those cash-rich corporations? “Companies will start spending their hoards,” he predicted. While they’ve contented themselves so far with initiating dividends and raising dividends and making acquisitions, “they can’t just keep raising dividends,” Hennessy says, and he expects companies to start spending to drive their top lines. “There hasn’t yet been a cost” to companies that have paused their spending, “but if your competitor is expanding,” you’ll have to start hiring, he argues. Hiring will lead to higher wages, which will lead to more consumer spending on more products being made by those companies that are willing to raise their capital expenditures, particularly since they can amortize those capex costs over the next 15 years. That way, he says, there will be “no hit to corporate earnings.”

That bullish sentiment on corporate spending is one of the reasons he thinks the Dow Jones Industrial Average will hit 20,000 in two to three years, and why he’s “very optimistic” about the U.S. economy and markets, despite the “headwinds” emanating from Washington, which he said most companies have already figured out how to blunt.

What about Japan? “Japan has copied the U.S.,” Hennessy says, and its “corporations are in great shape,” which is one of the reasons “I love Japan” even though when he bought those two Japanese mutual funds in 2009—the Japan Fund and the Japan Small Cap Fund from SPARX Asset Management—“people thought I was crazy.”

He cites a number of reasons why Japan is an attractive investment. First is Prime Minister Abe himself, who learned his political lessons from his first stint as PM in 2007. Then, Hennessy says, “he kept putting his foot in his mouth; this time, he ran on economics” alone, a lesson that Hennessy suggests U.S. politicians could learn from.

A second positive is the sharp rise in tourism—“who wouldn’t want to visit this beautiful country?”—particularly from the Chinese mainland. “There are 350 million middle-class Chinese within a three-hour flight of Tokyo,” he says (official figures put the number of Chinese tourists to Japan this year at 1 million for the first-half of the year which at its current rate would constitute a record year). Tourism will also be bolstered longer-term by the 2020 Summer Olympics which will be hosted by Tokyo.

As for those Japanese corporations that are in “great shape,” Hennessy thinks they will “raise wages because they’ll be making money,” leading to more domestic consumption, helped by Abe’s policies. While the recent announcement of a big round of quantitative easing by the Bank of Japan has led to a sharp decline in the yen and a rise in the dollar, Hennessy remains convinced that “in Japan, you’ll make money from companies, not from trading yen.”

Touching on politics a day after the November 5 midterm elections, Hennessy thinks that lower taxes, and an “easier-to-understand” tax code would be of incalculable help in deepening and broadening the U.S. economic recovery. “If you want the wealthy to move their money,” he says, “cut their taxes.”

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