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NATURAL GAS REMAINS A FUEL OF CHOICE

The Portfolio Managers of the Hennessy Gas Utility Fund discuss America’s role
as a global supplier of natural gas, the Fund’s alternative energy exposure,
earnings growth expectations, and how Utilities perform in a rising rate
environment.

March 2022

 * Ryan C. Kelley, CFA
   Chief Investment Officer and Portfolio Manager
 * L. Joshua Wein, CAIA
   Portfolio Manager


HOW HAVE RECENT GLOBAL TENSIONS AFFECTED THE AMERICA’S ROLE AS A GLOBAL SUPPLIER
OF NATURAL GAS?

The recent, unfortunate events with Russia and Ukraine have underscored a strong
demand for U.S. natural gas. In fact, it is expected that 2022 will be the first
time the U.S. exported more liquefied natural gas (LNG) than any other country,
surpassing Australia and Qatar. In the final week of January 2022, U.S. LNG
exports averaged about 13 billion cubic feet (BCF) per day, about 25% greater
than last year.



The conflict in Europe has made U.S. exports even more desirable as pressures
mount over disruptions in Russian natural gas. As a case in point, last June
about 60% of U.S. LNG was shipped to Asia. In January 2022, 70% went to Europe. 
The economics are advantageous for the U.S., regardless of whether LNG is
shipped to Europe, Asia, or any other part of the world. U.S. natural gas prices
range between $4 and $5 per million British thermal units (BTU) compared to over
$30 in Asia and Europe. This large price advantage is benefitting many companies
involved in LNG exportation including Cheniere—a 5% holding in the Hennessy Gas
 Utility Fund.


WHAT IS THE EXPECTATION FOR EARNINGS GROWTH FOR NATURAL GAS COMPANIES?

Earnings per share growth has been robust due to three main factors:

1.  The growing importance of natural gas and its usage domestically.
2.  An increasingly accommodative regulatory environment, which has allowed
these companies to earn robust returns on invested capital. 
3.   A huge undertaking in pipeline replacement and modernization, which has
driven capital expenditures and subsequently earnings growth.

In the past, the long-term growth rate of earnings per share (EPS) for utilities
was in the 3% to 5% range. Now, EPS growth has nearly doubled to about 6% to 8%.
Increases in natural gas pipeline replacement was one factor that drove capital
spending and helped significantly increase long-term EPS growth rates for gas
utilities. 


HOW MIGHT ELECTRIC UTILITIES BE IMPACTED BY THE “ELECTRIFICATION OF EVERYTHING”?

The world is entering a period where more electricity and significantly more
grid capacity will be needed as more people buy electric vehicles and other
appliances which use electricity. To meet this demand, companies are going to
have to invest heavily. In 2021, $755 billion was invested globally in renewable
energy and the electric grid, and according to some studies, the figure may have
to double through 2030 and quadruple by the end of 2050. Regardless of the scale
of the project, any investment in energy could be a boon to Utilities’ earnings
growth. 


WHAT IS THE ROLE OF NATURAL GAS IN A TRANSITION TO CLEANER FUEL SOURCES?

In 2020, 20% of electricity generated was from renewables, which is up from
about 5% two decades ago. We will likely see that figure continue to rise. In
fact, renewable energy is anticipated to be the fastest growing fuel across all
categories. 

However, we believe natural gas will continue to be an important part of the
transition to cleaner fuel sources as it complements renewables by providing
reliable energy during peak, emergency, and seasonal demand periods. In order
for net zero emissions goals to be achieved, it will need to be accomplished
concurrently across multiple energy sources.


HOW MANY FUND HOLDINGS HAVE EXPOSURE TO ALTERNATIVE ENERGY REVENUE SOURCES?

The Fund is primarily focused on the distribution side of natural gas, which
include utilities, major pipeline companies, and LNG exportation businesses. Of
these, about two-thirds of the Fund’s holdings have exposure to renewable
energy, including hydro, solar, and wind. Looking ahead, many more companies
plan to increase investments in renewables.   


WOULD YOU PLEASE DISCUSS THE FUND’S PORTFOLIO COMPOSITION?

The Fund’s composition has changed dramatically throughout its 32-year history.
Currently, the portfolio is divided into three primary categories: diversified
electric and multi-utilities (57%), pure play natural gas utilities (15%), and
Energy sector companies including LNG and major pipeline companies (20%). The
remaining 8% is comprised of cash, a water utility,  and a financial company.



Importantly, because the Fund does not invest in exploration and production
(E&P) companies, the price of the commodity is not a major driver of the Fund’s
performance. Rather the price gets passed through to natural gas customers. 
Instead, the Fund and earnings over time are generally driven by the demand and
usage of natural gas and electricity. Simply stated, the more the meter spins,
the greater the earnings for these companies.


WOULD YOU PLEASE COMMENT ON THE DIVIDEND GROWTH RATE OF COMPANIES IN THE FUND?

Over the last three years, the overall dividend growth rate for the companies in
the Fund averaged 4.23% per year, in line with its historical rate. The one-year
average dividend growth rate was a little lower at 3.79%, however, some
companies were growing their annual dividends at 8-10% per year. Importantly,
the increase in dividends resulted from a growth in earnings.

As of 2/20/22, 45 of the Fund’s 48 holdings paid a dividend, with an average
yield of 3.55%.1 

 

 * In this article:
 * Energy
 * Gas Utility Fund

1- Arithmetic average dividend yield is calculated as the sum of all dividend
yields divided by the count of that series of numbers.

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   Read the Call Recap ArrowRight


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Hennessy Funds
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The Funds' investment objectives, risks, charges, and expenses must be
considered carefully before investing. The prospectus contains this and other
important information about the investment company. Please read it carefully
before investing. A hard copy of the prospectus can be requested by calling
1-800-966-4354.

Performance data quoted represents past performance; past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance of the Fund may
be lower or higher than the performance quoted and can be found here. Neither
forward earnings nor earnings growth is a measure of a fund’s future
performance.

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

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

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

Glossary of Terms contains definitions and additional information.

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

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

News and Media Page:

To view the Morningstar ratings for the Japan Fund, please click here. (Media -
TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media -
CNBC-B. Macualey).

1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the
Hennessy Funds. Content is not investment advice, or a recommendation of any
security, strategy, or account type. Options involve risks and are not suitable
for all investors as the special risks inherent to options trading may expose
investors to potentially rapid and substantial losses.(Media - TD
Ameritrade-Rothberg)



To view the Morningstar ratings, please click here.

The Hennessy Funds are offered only to United States residents, and information
on this web site is intended only for such persons. Nothing on this web site
should be considered a solicitation to buy or an offer to sell shares of any
Hennessy Fund in any jurisdiction where the offer or solicitation would be
unlawful under the securities laws of such jurisdiction.

Quasar Distributors, LLC, Distributor.

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    * Topic
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    * Japan
    * Multi Asset
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   Featured Insights
   25 Years of a Focused Approach
   The Portfolio Managers discuss how the Focus Fund has rewarded investors over
   25 years. They also share their current outlook.
   Natural Gas and the Energy Transition
   We believe natural gas plays a role as an essential bridge to a more
   sustainable and reliable energy future and will help meet increased demand.
 * People DropdownArrow
    * Meet the Team
    * Portfolio Management
    * Chief Market Strategist
    * Client Services
    * Business Management
   
   Meet Our Portfolio Managers
   Our Managers average over 20 years of investing experience.
   Meet Neil J. Hennessy
   As Chief Market Strategist, Neil delivers powerful market and economic
   insights.
   Meet Masakazu Takeda
   Based in Asia, Masa is a recognized expert on investing in Japan.
 * About DropdownArrow
    * Firm Overview
    * Investment Philosophy
    * Invest With Us
    * Shareholder Forms
   
   OUR HISTORY
   Since our founding, our priority has been meeting shareholders' needs.
   HOW WE INVEST
   High-conviction strategies, managed for long-term results.
   REQUEST AN INVESTMENT KIT
   We look forward to the opportunity to work together.
 * News DropdownArrow
    * News & Press Center
    * Media Coverage
    * Press Releases
   
   TD Ameritrade - "Energy Sector Funds: GASFX and HNRGX"
   TD Ameritrade - "Stock Picks: CarMax (KMX), Restoration Hardware (RH)"
   TD Ameritrade - "Forecasting 2022 Performance For Financials"

 * Hennessy Advisors
 * My Account
 * Contact
 * Search Search
   Search Search
   


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