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Being a well-rounded
quantitative-based equity investment shop that has consistently delivered a positive
return to mutual fund shareholders has translated into a strong bottom line for Hennessy
Hennessy Advisors Inc.
7250 Redwood Boulevard, Suite 200
Novato, CA 94945
Neil J. Hennessy
Chairman, President and CEO
Interview conducted by:
Walter Banks, Publisher
Published March 15, 2007
Neil J. Hennessy has served as President and CEO of Hennessy
Advisors, Inc. since 1989, and as President and Portfolio Manager of the Hennessy Funds
since 1996. Mr. Hennessy manages approximately $2 billion in assets in six no-load mutual
funds, and he is currently ranked 6th on Barrons
list of Top 100 Mutual Fund Managers in the nation. Mr. Hennessy started his financial
career over 27 years ago as a broker at Paine Webber. Mr. Hennessy served as the
Co-Chairman of the National Association of Securities Dealer Business Conduct Committee
District 1 from 1987 to 1989 and Chairman in 1994.
Hennessy Advisors, Inc. is a publicly traded investment manager that manages
six no-load mutual funds. Each of the Hennessy Funds employs a time-tested, quantitative
investment formula and is managed with unwavering discipline and consistency.
CEOCFO: Mr. Hennessy, will you tell us
about your background and how Hennessy Advisors was started?
Mr. Hennessy: I have been in the
financial business since 1979. I was with Paine Webber (now UBS Wealth Management USA ),
where I was a retail broker, a branch manager and divisional sales manager during my
tenure, before opening Hennessy Advisors in February of 1989. During that time, I was
elected to the NASD District Business Conduct Committee, which is a disciplinary arm of
the securities industry, where if any broker dealers or registered reps run a foul of the
rules and regulations of the securities industry, they would come before the committee to
We started Hennessy Advisors in 1989, with no clients and no assets, and one of the things
that kept our doors open during the early period was that I did a lot of expert witnessing
for the securities industry. In fact, I have been involved in over 500 expert witnessing
cases. Then, in 1996 we started our first mutual fund.
How long have you been a public company?
Mr. Hennessy: Let me go a little
further back and give some additional background. In 1996, we started our first mutual
fund, the Hennessy Balanced Fund (HBFBX), utilizing the Dogs of the Dow investment
philosophy, which is a quantitative way of investing. With that, we learned how to write a
prospectus, file it with the SEC, go through the regulatory environment, and actually come
through it unscathed. In 1998, we started our second mutual fund, the Hennessey Total
Return Fund (HDOGX).
In April of 2000, I had an opportunity to buy a company called OShaughnessy Funds;
they managed approximately $200 million in two of their funds, the Cornerstone Growth and
Cornerstone Value Funds. We managed $20 million at the time, so they were ten times our
size. Within the two and a half month period that we had to do the acquisition, we ended
up having to not only do our due diligence, but we also had to get shareholder approval in
order to take over the management contracts. Lastly, we did not have the money to buy
OShaughnessy, but US Bank gave us $2.6 million at the prime rate with virtually no
personal guarantee, which allowed us to purchase those assets. Therefore, that brought us
then to over $200 million in assets. I had promised James OShaughnessy and US Bank
that I would repay the money as soon as possible. That led to the IPO that we did in May
of 2002. Nobody would underwrite us so we did something that was unconventional and we
took ourselves public. We raised $6.5 million dollars, paid off all our debt and told our
shareholders a couple of things; number one, we told then that we were going to build a
company that somebody would want to buy in the future. We wanted to make sure that we had
an exit strategy before we entered. Not that we are willing to sell, but you want to build
a company of such quality that somebody would want to buy.
The second thing that we told them was that we are going to continue to grow through
acquisitions and internal growth. If you look at what has gone on since we went public at
$10 a share in May of 2002, we have been extremely fortunate. In September of 2003, we
were able to acquire a small growth fund, the SYM Select Growth Fund. It was $35 million
in assets, but that launched our fifth no-load mutual fund, which is called the Hennessey
Focus 30 Fund (HFTFX), which actually turned out to be the number one US diversified fund
in 2005 returning approximately 33%. In February of 2004, we had the opportunity to
purchase the Lindner Funds (Lindner Asset Management, Inc.), which was approximately $300
million in assets that we merged into four of our funds. In July of 2005, we were able to
purchase The Henlopen Fund, which was approximately $300 million. That started our sixth
no-load fund, which was a clone of our first fund, our Hennessy Cornerstone Growth Fund
(HFCGX) and now we have our Hennessy Cornerstone Growth Fund, Series II (HENLX), which
utilizes the same investment formula as Cornerstone Growth, but rebalances at a different
time of year.
You have come a long way from no assets!
Mr. Hennessy: Weve been
fortunate. By September 30th, 2000 we had approximately 10,600 shareholders and
managed $200 million. As of September 30th of 2006, we have approximately
129,000 shareholders and today we manage approximately $2 billion.
What is the advantage of investing in an asset management company?
Mr. Hennessy: The advantage in
investing in our asset management company is how well we manage the company, our
shareholders money and the mutual funds. We take a long-term view and what makes us
different is we are a quantitative shop; in other words, we do not allow emotion to enter
into our investment decisions. We are highly disciplined. Another thing that sets us apart
is when you phone in you get a real live person. We do not have voice mail. We do that on
purpose because we handle all of our own shareholder servicing. We do not outsource it.
That is particularly interesting to the shareholders because when they phone in, anyone
that answers - all the way from the receptionist to myself - can answer almost any of
their questions and that is what they want. We also keep a very tight organization; not
only do we manage the six mutual funds and keep up with all the regulatory issues there,
we also manage a public company and have to keep up all those regulatory issues and all
the new accounting standards. We do this with just 12 people. Our people can multi-task,
and they are very intelligent. You look at a small company like ours, and what we bring to
the bottom line, with such a small staff thats what sets us apart.
Could you have grown this way without becoming a public company?
Mr. Hennessy: Its hard to say,
since that is the path that we chose. We brought the stock public in May of 2002 at $10.00
and we have already split it 3 for 2 twice, and paid two cash dividends. Therefore, on a
cost-adjusted basis, you paid about $4.45 per share at the IPO and it is today trading at
Your earnings have increased 37%; to what do you attribute that?
Mr. Hennessy: Our increase in earnings
is due to an increase in assets, because our two sources of revenues are management fees
and shareholder servicing fees, which are both tied to the amount of assets under
management. What we try to do is increase the assets under management, hold our costs
down, and let earnings drop to the bottom line. What is really interesting is if you look
into the investment management business, there are very few companies that are publicly
traded out there. If you look at how well those companies have done over the years, you
will be amazed, be it from Franklin Templeton Mutual Funds (Franklin Resources Inc. -
NYSE: BEN), T. Rowe Price Group, Inc. (TROW), Federated Securities Corp. (NYSE: FII), you
name it, and they have done extremely well.
Looking at your business, what do you think you need to do to continue this growth over
the next few years?
Mr. Hennessy: I cannot tell you what
is going to happen in the future, but we come in every day, we put our heads down, work as
hard as we can and what happens happens. We manage the company very conservatively from
the standpoint that our debt is about $11 million and we have almost $10 million in the
bank. At some time in the next 3 or 4 months, we could pay off all our debt and the worst
that could happen is we will just pass everything out in the form of dividends. What we
always have done is look after the shareholder first."
How do you attract more business to Hennessy?
Mr. Hennessy: Instead of hiring
wholesalers, or salespeople, we hired a top notch PR firm; SunStar, located just outside
of Washington D.C., and they sell us to the media. In other words, they
introduce us to the media so I can tell the story of why we are different and why our
funds are so good. They have done a wonderful job and in fact, today you will see or hear
the name Hennessy on TV, print or radio once every three to four days. What we have tried
to do is just get our story out and continue to tell it. Since May of 2002, we have had
over 500 TV appearances, or radio or articles, so we have been fortunate that way."
Is there anything you would like to say to our readers that may be interested in your
Mr. Hennessy: If you look at our Hennessy Cornerstone Growth Fund (HFCGX), which is
a flagship of Hennessy Advisors, you are going to see that since inception, which is ten
years now, we have only had only one down year and that was in 2002 when we were down 4.7%
versus the S&P 500 down 22.1%. However, three years, five years and ten years, the
annualized return is 12.98%, 14.91% and 16.18%, respectively.
If you take us and put us up against the S&P or any of the indexes, we have clearly
done so much better than what is out there. We have a well-rounded equity shop here, with
products for all types of investors. It is all about consistency and making sure that you
put shareholders interests first.
In closing, you stress the uniqueness of your funds; what makes you unique?
Mr. Hennessy: What is different is
that we do a lot of quantitative back testing in different arenas, either small cap,
mid-cap, large-cap, value, growth, etc. Then we come up with the top-performing formulas
and implement those formulas. Another difference is that our investors know exactly how
their money is being invested; there is no quarterly window dressing, no style drift, what
you see is what you get. That gives the shareholder comfort. I know that many people chase
returns. However, the real measure of a good manager is one that is consistently
delivering positive returns to his shareholders over time.
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