Voicemail after business hours and providing alternative investment products to clients -- two things that Novato, Calif.-based asset management firm Hennessy Advisors avoids. That's because both the habit and product offering are examples of client disservice from the perspective of Neil Hennessy, the firm's founder and CEO, who sums up his approach as "straight and narrow."
Taking a simple approach hasn't hindered performance at Hennessy's firm, which reported $5.9 billion in assets under management at the end of 2014, a 33% increase from the previous year. In the first part of a conversation with Money Management Executive, Hennessy discussed his firm's approach and why it shuns some market trends.
What elements do you attribute to Hennessy's continued growth?
The success has driven by being focused. When I started the company and took it public, I told the shareholders we would grow organically and through acquisitions, and at the same time, try to bring high quality financials to the bottom line. We have stayed focused, we have grown organically, and we have grown through acquisitions. I have made seven acquisitions -- 23 different mutual funds, each and every one was done on time with no hitches.
Shareholders always come first. We truly believe that, and we try to distinguish ourselves. I'll get letters, emails or phone calls because of the customer service we provide. We do not have voicemail. I refuse to have voicemail. I want the phone answered within the first two rings, and I want someone there who can answer the shareholder's question. You can only imagine March of '09. But we were there, seven days a week, answering shareholders' calls. When we're closed, we're closed. You don't go into some voicemail box and wonder if anybody ever got your message.
One of the things that we've been fortunate for, since I started my first fund in 1996, is that I don't care about indexes. What I care about is making the shareholder money in the mutual fund. Now, if I don't beat an index, that's fine. But if I beat an index and lose 20% of your money, it doesn't really matter. I can boast all I want.
So what I want to do is make the shareholder money. If they leave us because we didn't make them enough money, that's fine. But when I look back over all the years, including 2008, we have made our shareholders on a year-to-year basis 82% of the time. Only 2008 took the percentage down. So that's the idea. You take things conservatively, and you make the shareholder money, they'll stay with you.
That's that active element that still has value, when the industry has largely shifted to passive?
It goes back to distinguishing yourself. Go back to 1996; there are 8,000 mutual funds out there. What's going to make us different? What we did was come up with quantitative strategies. We didn't do any qualitative investigations. I started the first fund in '96, the second in '98. I bought two funds in 2000, took the company public in 2002, and now we have eight quant funds and some subadvisors, and couple that are actively managed financial funds in-house. We've tried to keep it very simple and stay focused. We have 16 mutual funds. That's all we do. We concentrate on those 16 clients. We don't have a separately managed account business. We don't have institutional business. The shareholders are paying us to keep our eye on the ball for them. I know you can grow bigger and quicker by having some of these products, but it means you're taking your eye off of the ball for your clients.
Is that a feature of the market now? The dedicated custodian versus the flavor of the month product provider?
That's a thorn for me. They come up with these new and greatest ideas, and then everybody moves into them. But it's just a hot item.
A classic example, in the late 1990s you had Morningstar and everyone else talking about being tax efficient. But how can I be tax efficient; I don't know all my shareholders. Everyone's got a different tax situation. I'm here to make money and that's it. But Morningstar and ratings agencies got on me because I wasn't tax efficient. Now, we made our shareholders money in 2001 and 2002 when everyone else went south. I said, "I guess everyone's tax efficient now." So that whole gig went out about trying to sell the public more tax efficiency.
Target date funds was another one. Everyone started coming out with one. Well, the average mutual fund holder is in a fund for about 3.5 years, or about three years in equities and 0.5 for fixed income. So you can say it's going to be out to 2030, but they aren't going to be there. Either they didn't get a return equal to what other people were getting, or they lost money and got out.
But it was a fad. We did not commit any capital or get into that arena for that simple reason.
You can look at the alt business, you can look at the derivative business -those are the hot buzz words, and you've got to be there. You can look overseas; we have two Japan funds. It's all about what can we sell today.
The whole nine yards is what have you done in the past, and what are you going to do in the future? When you look at what we've done is kept it simple and straightforward. Our shareholders know how the money is being managed. So for instance in our quant funds, if I get hit by a bus today, it doesn't affect the shareholders. So what will be the next idea that comes up? Who knows, but we just stay straight and narrow.
How then do you regard the growth of the ETF market?
If you're fortunate enough to raise some money and can keep your fees in the 50 basis point range or more, you'll be okay. ETFs are a really tough game because everybody's just cannibalizing themselves. You cannot make money at four basis points or eight basis points. But that's what you get with the Vanguards, and they're selling all this kind of stuff.
Vanguard's a very good company, but at the same time, Jack Bogle's out there saying fees are too high. Well, it's not about the fees; it's about the return to the shareholder. So, take my mid-cap, where the expense ratio's 1.2%. You can match it against Vanguard, which is 30 basis points. At the end of the day, our fund is so much better in terms of returns. But they sell low cost. That's what is going to happen with ETFs. Nobody's going to make any money off of them.
Quality is a very tough sell. Cheap is easy, when you're talking about the mass market. The harder the sale is, the better the product. And that can go across any industry.
With that in mind, is there still a market for the well-regarded, traditional custodian model?
The industry has been evolving. I was an old line stockbroker, so I had to pick the stocks that I liked. I had to research them, and then I had to call clients and have them buy it. And I owned that recommendation, good or bad.
But the brokerage firms don't want the brokers thinking anymore. They just want them to raise money. That's how the RIA market has evolved to where they can go out on their own.
Among the clients, there's not a lot as many people on the retail side doing their own picking, they are going with RIAs, and the RIAs will stay with you longer than a retail client that might hit the Schwab Select List, or Fidelity, and move in and out. Their money becomes stickier, that's why you're seeing a lot of M&A action in the RIA market. People want those sticky assets and fee-based income. So the RIA market will continue to grow, and more clients are gravitating over there because firms don't want commission-based stockbrokers anymore.
It's interesting because then the SEC looks at it, and says, 'Well you're charging Lou 1% a year, and he only did two trades. That's ridiculous, he shouldn't have been paying commission, and you overcharged him.' Well, no, he wasn't overcharged. There was no reason to make a trade. You're paying me for my advice, be it if I trade or don't trade. But the SEC says there's not enough activity. You can't win.
That's what we're all dealing with now, the regulatory environment. Being a public company, I call it the three-headed dragon. You have the legislators, the regulators and then the accounting boards. Everyone wants a piece. They all want to put in new things, and it just costs a ton of money, let alone employee time.
Managing the money was the easy part. I had to become a student of managing the company. That's helped us through these tough times, which are becoming more and more difficult on a daily basis.
Please elaborate: Aside from regulation, what are the key operational issues you deal with on a regular basis?
From the standpoint of the mutual fund industry, everybody's supposed to be created equal. The retail investor that has 10 shares should get the same service as someone with 10,000 shares. That doesn't happen. It's just not the real world. But you have the SEC looking at that.
Part of the problem is that when we put in new rules and regulations, you have to look forward, not today, not what you want to do right now, but what are the unforeseen consequences that you could end up with.
One example is proxies. You ask people at the SEC, ask attorneys, ask anyone: Do you vote your proxies or do you throw them away? We send you a proxy, you chuck it; we send you a letter; you chuck it. We end up overnighting you a package, and then we start to call you, and that's when you get upset with us. I'm just trying to get you to vote. Instead of all that time, effort and money, why don't we just say, you get notified three times, if you don't vote, then your vote goes with the independent director's recommendations, and it's done. But right now it's so convoluted. And that's just a small little thing.
You look at the SEC and money market funds -- that didn't take a genius. If you have U.S. Treasuries and CDs, and they're due in 30 or 60 days, why not leave it at a buck? If you're going to buy corporate debt, you want to take the risk, let that flow. But that took almost four years to get down to that simple decision.
The authorities keep coming up with more things. Now they're biting in on transfer agent fees. And they switch rules in the middle of the game, and it becomes very frustrating.
The SEC has become a revenue producer for the government. They get so much money they're in the black. They're bringing in so much in fees. And it's very tough for companies, because they come in, and they say this and this. And if you [challenge them] it's going to cost you a million dollars in attorney's fees versus a $100,000 fine. They got you over a barrel, especially a mid-sized firm like ours.