Hennessy Advisors of Novato, Calif., which now manages five no-load funds, has been shopping again.

This time, the firm, with $1.4 billion in current assets, has signed an agreement to acquire the $340 million Henlopen Fund, managed by Landis Associates of Kennett Square, Pa.

Hennessy will pay 2.25% of the fund's assets at the close, roughly $7.65 million in assets. But that price tag could be slashed if assets fall due to redemptions, market volatility or a pending lawsuit. According to data from Morningstar of Chicago, the fund had $333 million in assets as of March 21.

Hennessy counts this deal as its fourth acquisition and has selectively scooped up eight previous mutual funds within the past five years, with full expectation of purchasing additional funds. "We're still shopping," said Neil Hennessy, president of Hennessy Advisors. "We are slow and patient."

In 2000, Hennessy acquired two mutual funds with a collective $200 million from O'Shaughnessy Capital Management of Greenwich, Conn. In 2003, it acquired the $35 million SYM Select Growth Fund from SYM Advisors of Warsaw, Ind. And in 2004, Hennessy acquired the five-fund Lindner Funds lineup from Lindner Investments of St. Louis.

Instead of merging the fund into an existing fund, The Henlopen Fund will become the sixth fund in the Hennessy lineup, will be renamed the Hennessy Cornerstone Growth Fund II and managed under Hennessy's proprietary formulaic growth investment strategy. But in keeping the fund as a separate one, Hennessy can retain The Henlopen Fund's great performance track record.

Hershey Bar?

This comes at a perfect time for Landis Associates, whose chairman and founder, Michael Landis Hershey, has been rumored to be ready to retire and seeking an exit strategy from the mutual fund business.

According to the most recently filed Henlopen Fund prospectus, Hershey is at least 65 years old. Although the press release announcing the fund's acquisition pointed to the increasing difficulties of cost-effectively managing a stand-alone mutual fund within the current regulatory authority as Hershey's reason for selling, visions of retirement were probably a factor.

"It is more difficult to operate single funds, and there are more synergies when you have more funds and a larger base," said Mark Gundersen, a partner with the Wilmington, Del., law firm of McCarter & English, who represented Hershey in his sale of the Henlopen Fund. But Hershey had been looking for partners, and at approximately age 66, this was "a logical retirement strategy," he added.

Separate and apart from managing The Henlopen Fund, Landis Associates has been entangled in a civil lawsuit filed last June by the Securities and Exchange Commission in the United States District Court for the Eastern District of Pennsylvania. In its lawsuit, the SEC charged Landis Associates, Hershey and another individual who serves as a Henlopen Fund board member, with inappropriately investing funds from a private client's separately managed account into a now-defunct healthcare technology company. Hershey owned shares of that company and was one of its directors between 1998 and 2001. According to the SEC's allegations, that fund board member served a dual role as the chief financial officer of the healthcare concern.

Neither The Henlopen Fund nor Landis Associates' management of the fund has been implicated in any way in the SEC's lawsuit.

The SEC declined to comment on the status of that lawsuit, as did Hershey, who, when reached on vacation for comment, would only say that his firm had answered the allegations and believes them to be false. Hershey referred MME to his attorney, who was also on vacation but could not be reached.

Innocent or not, Hershey could have been forced by regulators to step away from the fund he created, noted the disclosure in The Henlopen Fund's 2004 annual report recently filed with the SEC. Should the SEC prevail in its lawsuit, Landis Associates might have been barred from serving as the investment advisor to The Henlopen Fund and Hershey could have similarly been barred from serving as the fund's top executive.

Despite Hershey's particular difficulties, merger and acquisition activity has been brisk within the asset management industry (see chart). Many industry insiders point to the increasing compliance burden that has put tremendous pressure on profit margins, particularly for the small- to mid-size firms, and has caused advisors to reevaluate their continuation in the fund business. Those compressed margins will drive additional M&A, predicted Robin Thurston, director of research at Lipper of New York.

So far, with 10 or so acquisition deals completed since January 2004, it is probable there will be a similar number of deals again in 2005, said Andrew Sloane, an M&A analyst with SNL Financial of Charlottesville, Va. Recent deals have largely allowed buyers to expand by acquiring a fund, manager, team, new capability or simply increase assets under management, he said.

Whether or not a smaller fund or small fund group manager stays or exits the business "depends on how strategically important that fund is to the company's business," said Darlene DeRemer, a partner with Grail Partners, an investment bank with offices in Boston, New York and San Francisco. Advisors who determine that a fund is ancillary and not their core business have increasingly decided to sell the fund or put it up for adoption by larger companies with a wider breadth of offerings, she said (see MME 10/4/04). John Hancock, Dreyfus and Pioneer Investments, which is a "serial adopter," have picked up funds this way, she noted.

The overriding question many advisors are asking themselves is: "Does it make economic sense to be in the fund business?" said Eric Lansky, senior vice president and director of marketing for The Reserve Funds in New York. Reserve has been busily acquiring small, niche funds and adding them to its Hallmark Funds series.

Many smaller fund managers are hoping to hang on long enough to grab Morningstar ratings, with the rationale that "it will be different with three-year numbers," he added. Many institutionally oriented firms that started up mutual funds simply to cater to friends and family with smaller pocketbooks are now facing that decision, he said.


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