NEW YORK (TheStreet) -- Despite all the negative headlines, the economy is recovering quite nicely, says Neil Hennessy, portfolio manager for the Hennessy Focus 30 Funds (HIFTX). But that does not mean investors should give up on discount retailers such as Dollar Tree (DLTR - Get Report) and Family Dollar (FDO).The $145 million fund, which garners three stars from Morningstar ( MORN - Get Report), is up 21.5% over the past year, better than 96% of its Morningstar peers. Over the past five years, the fund has returned nearly 5.8% annually, better than 90% of its rivals. Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format. What is the state of the economy? Hennessy: I think the economy is in pretty good shape. The perception is that companies are not making money and people are losing their jobs. The reality of the situation, however, is that companies are making a fair amount of money, if not a lot of money, and 90% of the people in the United States are employed. What's going to be the impact of the November election? Hennessy: I think the impact is going to be some clarity on Washington's attitude toward business. Right now there is no clarity on taxes and health insurance and regulation, so you simply cannot go out and risk shareholder money and hire people. Why do you like discount retailers if you think the economy is recovering? Hennessy: Even if somebody is struggling financially, he or she still has to spend money on the basic necessities of life. And consumer attitudes have changed, so they will continue shopping in a discount retailer once they try it. So a retailer like Dollar Tree will do nicely because everything in the store is a dollar or less. If you want to step up from there, you can go to Family Dollar, where everything is about $10 or less. And if you want to step up from there you can go to a Wal-Mart ( WMT - Get Report). And the next step is to a Ross Stores ( ROST - Get Report) and you keep stepping up. So I like the low-end retail area because you can expand your margins so much easier than you can on the upper end. What is your view of defensive stocks such as utilities, tobacco and consumer staples stocks? Do investors want to be in these now? Hennessy: When we rebalanced our Focus 30 fund we had no consumer staples in it. It's not that those companies are not going to do well. But if we are coming out of a recession you want to be out of defensive stocks and into more offensive stocks like the ones I just mentioned. With the dollar being engineered to go lower, should investors want to be involved in export-oriented stocks? Hennessy: The problem is, how much further lower can it go? Now when you are playing in the commodity market you are talking about leverage of 10 to 1. And I will tell you that once the selling begins on the yen, it will beget more selling and the yen will drop. The same thing will happen once the buying begins on the dollar. The shorts are going to cover, and the dollar will get much stronger. A weak dollar is good for us right now because we can export more. It's not really good for Japan, but you can see where it's going to go opposite at some point in the future, and it is not going to be too far off. -- Reported by Gregg Greenberg in New York. >To submit a news tip, email: firstname.lastname@example.org.
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