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Hennessy Funds 2013 Annual Letter

February 18, 2014 | About:
Holly LaFon

Holly LaFon

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Dear Hennessy Funds Shareholder:

Looking back at 2013, it was a year of many highs and lows economically, politically, and socially here in the U.S. and around the globe. The year was marked with some fond memories: we survived two fiscal cliffs, anointed a new Pope, watched the Red Sox don facial hair and keep theirtown "Boston Strong," and home prices began to rebound around the country. But the year was also scarred by worsening political partisanship, civil unrest in many countries, flooding in Colorado, wildfiresin the West, and the tragedy of the Boston Marathon.

We understand that the economic landscape isstillrife with problems. Economic progress and growth are uneven, at best, and unemploymentremains high. The hurdlesthat, in my opinion, are stalling a more robustrecovery here in the U.S. are the same ones we've faced forseveral years: we are no closerto receiving the clarity we need from ourleadersin Washington on taxes,regulation, and healthcare. Companies are stillsitting on record amounts of cash, but they appearreluctant to hire in earnest until they feel they have clear guidelines on these majorissues. Instead, these cash-rich companies continue to increase and initiate dividends, buy back stock and participate in accretive mergers and acquisitions. We are seeing these activitiesspread beyond just large, value-oriented companiesto more small and mid-cap and growth-oriented firms. While these activitiesshould benefit the shareholders of these companies, these initiatives are not creating jobs, which I believe isthe critical missing piece to a thriving and growing economy. Even through thisslow-growth economy, the U.S.stock market hasfound waysto carve out healthy returns. Forthe twelve months ended October 31, 2013, the Dow JonesIndustrial Average (DJIA) returned 21.82%, while the S&P 500 Index returned 27.18%. Companies comprising the DJIA and the S&P 500 continue to have strong balance sheets and are generating respectable profits. There are many attractive stocks with strong and improving fundamentalsthat I believe present compelling investment opportunities. In fact, through the mutual fund portfoliosthat we manage, we are seeing improvement across asset classes and in many sectors, including financials, natural gas, housing, and consumer discretionary. I believe that innovative businessleadersin this country will continue to find waysto make money fortheirshareholders.

Japan Market

We have witnessed a strong resurgence in the Japanese market overthe past year. While some may have been surprised by strength of thisrecovery, we believe that we are finally seeing the result of the structural and politicalreformsthat have been taking place in Japan for a number of years. The Japan market was among the top performing markets worldwide overthe past year, with the Tokyo Price Index (TOPIX)returning over 33% (in USD terms) forthe twelve month period ended October 31, 2013, and Japan was by farthe highest performing Asian market.

Japan's prime minister, Shinzo Abe, and his bold monetary,stimulus and growth policies, termed the "Three Arrows" of "Abenomics," appearto be reversing almost two decades ofslow growth and deflation and moving the country into a new cycle of recovery that we believe will be sustainable. The Bank of Japan has undertaken an aggressive Quantitative Easing program,similarto what the Federal Reserve did here in the U.S., causing the Yen to weaken, which in turn hasincreased the demand for high quality Japanese productsthroughout the world. However, while the weakening of the Yen may be a catalyst to attract investorsto Japan, we have never believed that the Japanese equity market issimply a Yen play.

With anticipated politicalstability forthe next few years and with a strengthening relationship between government and Japanese businesses, we believe that many of the economic growth strategies proposed by Prime Minister Abe will have the support needed to succeed. Despite strong returns overthe past year, we do not believe that the Japanese market is currently overvalued, butrather we continue to believe that there remain strong valuesin high-quality, Japanese companiestoday and forthe long-term.

I am very confident that we are in a long-term,secular bull market fueled by solid economic fundamentals. I am encouraged by the strong returnsforthe major U.S. and global financial market indices and also by the positive performance of each of the 16 Hennessy Funds overthe past twelve months. However, while we have seen consumer and investor confidence on the rise, we still don't believe that investors have fully returned to investing in equities, and particularly in U.S. equities. When investors do return to equities in earnest, itshould bode well forthe economy.

At Hennessy we remain focused on investing with fundamentals and committed to our proven investmentstrategies. Treating clients honestly and ethically, building strong partnerships and managing money forthe sole benefit ofshareholders are the principles that our business was founded on, and those same principles guide ustoday, nearly 25 years later. If you have any questions or want to speak with us directly, please don't hesitate to call us a t(800) 966-4354.

Best regards,

Neil J. Hennessy
President and Chief Investment Officer

Past performance does not guarantee future results. Mutual fund investing involves risk. Principal loss is possible. Opinions expressed are those of Neil Hennessy and are subject to change, are not guaranteed and should not be considered investment advice. The Dow JonesIndustrial Average and S&P 500 are unmanaged indices commonly used to measure the performance of U.S.stocks. The Tokyo Price Index (TOPIX)is a market capitalization-weighted index of all companieslisted on the First Section of the Tokyo Stock Exchange. One cannot invest directly in an index.


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