One fund has a formula that has enabled it to consistently beat the S & P 500 : the Hennessy Cornerstone Growth Fund. The fund uses a formula-based strategy for investing, according to its portfolio managers Neil Hennessy, Ryan Kelley, and Joshua Wein. “What that does is that really helps to let us stay consistent over time,” Kelley and Wein told CNBC Pro in an interview earlier this month. And the outperformance has been proven to stick — even though it doesn’t buy into the megacap stocks that have repeatedly driven the S & P 500 to new records. This fund shot up 66.23% over the last year to May 31, beating the S & P 500’s 28.19% in the same time frame. Bring it further to the last five years, and it has still beaten the S & P 500 — gaining 20.82% for its average annualized total return, higher than the index’s 15.8% in that time period. And since the fund was launched in 1996, it has gained an 10.13% in average annualized total return, more than S & P 500’s 9.58%. Here’s a step-by-step guide on the strategy they’ve used since the fund was launched, according to Kelley, who visualized it as a “giant funnel”: From all the companies publicly traded in the United States, including overseas stocks listed as American Depositary Receipts, the selection is whittled from roughly 5,000 stocks down to 50. Each stock holds a 2% position. The stocks have to fulfil the following criteria: Be above $175 million in market capitalization; have a price-to-sales ratio of less than 1.5x as a valuation metric; have earnings growth on a year-over-year basis; and have a positive stock price return over three and six months. That leaves the selection with around 100 to 150 stocks. They pick the final 50 by ranking them based on the best one-year price performance. “We’re trying to combine value with momentum and some growth,” Kelley said. Those two factors have “worked very well” for this fund, he added. “We end up finding companies and companies that enter the portfolio that are good quality companies. They’ve seen some earnings growth that are trading at low valuations, but that have already started to turn the corner and once we see positive price appreciation over three and six months, you know that that company’s [got] something good going on there,” he added. Regardless of how well any stock in the current year’s portfolio does, the fund managers will rebalance the fund once every year in the winter using this formula. “We’re not going to own it at the very bottom, or … on its way up, and there still could be a nice runway after that. And … sticking to a really tight valuation metric, and then also combining momentum. That’s what differentiates this fund and I think has led to [it] doing well over years,” said Kelley. One hot stock that was recently removed from their selection following their most recent culling last winter — was Super Micro Computer . The stock, which makes artificial intelligence systems and graphics processing unit servers, has shot up since last year on the artificial intelligence buzz, with its gains rivalling Nvidia’s at one point. It was one example of how they “removed the emotion” in investing, said Wein, saying that Super Micro was up over 900% from the time they bought its shares to the time they sold it. In the past three months, however, the stock lost nearly 15%. “After 100% or 200% [return] I think 90% of people would have sold it and then after maybe 500% [return] maybe one person out of a million would have kept holding it,” Wein said. “Regardless of how it’s done, we’re selling it if it doesn’t meet the criteria, but I think that even though you could miss more of the run, I think that more often than not, we’re catching the belly of the move, and I think that speaks volumes.” Stocks the fund owns Most of the stocks in the outperforming fund aren’t actually in tech but in the industrials, consumer, financials and health-care sectors — because of the formula they use. The required price-to-sales ratio of less than 1.5 automatically disqualifies many high-margin companies such as tech and pharmaceuticals, Wein said. Megacap tech stocks “just don’t get into the portfolio” because of those criteria, said Kelley. The fund also promises “growth at a reasonable price,” and the “reasonable price metric” they use is that price-to-sales ratio, Kelley added. “Only about one third of the whole market [that] trades less than 1.5 times price to sales. So it is a very restrictive number,” he said. “So that’s how we make sure we’re buying it at a reasonable price.” These are the stocks that are the top contributors to the outperformance of the fund — in three time periods: the past year to June, year-to-date as well as since its most recent rebalancing in mid-April till June 20. They discussed three U.S. names that are “representative” when it comes to their definition of growth and “good valuation.” One is industrial firm Emcor , which provides building and construction services. It is the only name which survived in the recent rebalancing to the current batch of 50 stocks, said Wein. “They’re kind of benefiting at least in the United States from the growth in infrastructure spending on things like data centers and pharmaceutical manufacturing and semiconductor manufacturing,” he said. “All those facilities have to be built and ventilated.” Another name is Urban Outfitters , which was a “big deal” decades ago but has been “kind of forgotten about,” Wein said. He added that although the core brand has “become less of a story,” some of its other brands it manages, such as Free People, is “growing at a nice clip.” The third stock they like is Blue Bird , a bus manufacturer known for producing school buses that has gone into electric buses. Wein pointed out that it’s the best-performing electric vehicle stock so far this year. “I don’t think any growth stock investors would ever be looking at a school bus manufacturer that’s been around … so investing doesn’t really have to be terribly exciting to make a nice return. You just have to kind of look where others are not looking. And I think that this framework forces us to look at areas that we would never look at,” Wein said.