If people sometimes decide to take a job because they're promised a spacious office with a view, why not give that to every employee?
Though it sounds outlandish, Neil Hennessy says not only was he able to convince his board to sign off on the plan, his firm Hennessy Advisors has managed to secure loyalty and productivity from every employee by providing such creature comforts.
"One of the things that I vowed was to never let any regulatory or rules representative take the fun out of the business," says the CEO and founder of the Novato, Calif.-based asset management firm. "You have to love what you do."
In the second part of a conversation with Money Management Executive, Hennessy discussed regulation, Asian investment and building employee loyalty.
Everyone is complaining about different aspects of regulation, that it is too burdensome. But do you think this is self-inflicted?
That's a question no one asks: How is the industry messed up? What has it done wrong? For example, the market timing issue. If you put in a trade after 4 p.m., that's against the law. But people timing funds - that's not against the law. But essentially, the big firms didn't want the bad publicity. Just pay a huge fine and get rid of it. But American Funds said no. They took it all the way and won. It cost them a ton of money, but they won. So the industry has been clean. How many mutual funds have you heard about that defrauded shareholders? Now, are there going to be crooks? Yeah. But the industry has very much been clean.
Regulators are focusing on cyber issues. How has your firm handled the operational challenges?
We haven't had any challenges. In 1995, I employed the duties - everything from transfer to custodian administration to U.S. Bancorp's mutual fund services, and they are just awesome. They're well in front of the game. If you look at U.S. Bank as a corporation, it's a wonderful company. We've never had a problem and (President) Joe Redwine takes that issue very seriously. Can something happen? Anything can happen. You try as best as possible to stop breaches. But there's always somebody smarter in the room. They'll come up with a creative new way to do something. You just hope it doesn't happen to you.
A number of funds are wrestling with how to make sense of their big data. Has that come up as a leadership issue at your firm?
No, because we don't sell our database, and we're not trying to make money outside, in another arena. That might be someone else's business, but it's not ours. I think though everyone wants to keep their clientele to themselves. Now you have your own issues - when I look at U.S. Bancorp, they are a third-party custodian and they handle everything. I can't really speak to them, but you're going to have more issues when you have everything in-house. If you custodian, you administer, you transfer, you're going to have issues. U.S. Bancorp takes care of all that for us. We still oversee it, we do our due diligence.
Switching to product offerings, what fund are you most proud of, and which one needs recalibration?
I'm proud of all my funds, but I guess I'm most proud of the first fund that I brought out in 1996, and it is still around. It's not a huge fund, it's a balanced fund. It's a one-star fund, and it will never be a five-star fund, unless the market craters, because half the money is in T-bills, and the other half is in the 10 highest-yielding Dow Jones stocks. So it will never be a five-star fund, but in 2008, it sure saved people a hell of a lot of money in 2009.
We have two Japan funds, and I just love Japan. I know everybody wants to look at BRICS and Asia, but Japan is the gateway to Asia. It's a huge story and it's going to get bigger and bigger. The short version is that the government really wants the people and corporations to do very well, and they want the country to do well. It's not the government fighting business ... We've just been waiting for the Yen to break.
Most investment executives and businesses though are focused on China.
Well let's think about that. Everybody's saying that you have to be in China, they're growing at 25% a year. Mathematically, you can't keep growing at 25% a year. It's not going to work. So then it slows to 20%. Then the figures; who knows if the figures are real anyways. We saw all the companies that went public here and everybody goes, 'Oh, those figures aren't right.' Imagine that! It's China. You think they're going to give you the right numbers? Not a chance.
But interestingly enough, one-third of that population is now middle class. And they have money, and Japan has the product. It's unbelievable the amount of money the Chinese want to spend. But they won't spend it in China out of fear of knockoffs, they'll go to Japan to get the real thing. Then you have India, with another 1.3 billion people.
There's definitely awareness in the industry that sheer demographics will ensure future new clients will be from that part of the world. So how do U.S. asset managers tap into that opportunity?
I think it's through partnerships. Our subadvisors are in Tokyo, on the ground there. That's why we have the best U.S. Japan-only mutual funds. We've beaten everybody. So if I'm going to move into China, into India, or wherever, I'm going to find the best manager that's on the ground to manage the money for our shareholders, but I want to make sure the expectations are where they should be, and the risks are spelled out.
I don't think you can manage money in any of those countries, including Japan, from Wall Street, or Chicago, San Francisco or Los Angeles. You have to be there to see things.
Going overseas is an operational challenge even for the largest fund companies, though. What's your strategy?
We have 16 mutual funds. We have a publicly-traded company. We have all our service people. We have five subadvisors. We do this with 18 people. We do approximately $2.2 million in revenue per employee. We are good at what we do, and I pay my people well, depending on what comes to the bottom line.
That's how we get paid, which is different than the industry. We give you a salary and enough money for you to take a vacation but not enough money to save. It's going to be your bonus, and that depends on how much you bring to the bottom line to shareholders with Hennessy Funds. If you look at all the people who've been with me for a long time, they made less in 2007 than they did in 2006, and they made less in 2008 than they did in 2007. How would you like to see your income go down for four straight years? But they stuck with me. With only 18 people - we recently passed $6 billion in assets - dealing with all the regulatory hurdles, and you can imagine what they are being a publicly-traded company, you just have to do something different.
So if I want to go overseas, I'm not going to send people to do all that. I'll hire the best people already there. Trying to be the best is just going to take a long time.
On paper is one thing, in practice is a whole other thing. So you do as much prep work as you can, but then you have to take a look at the unintended consequences that may or may not happen.
From a leadership perspective, what have you done to inspire the sort of employee loyalty you've enjoyed?
One of the things that I vowed was to never let any regulatory or rules representative take the fun out of the business. You have to love what you do. You've got to want to go and be with your co-workers. The easiest way to do that is hire people smarter than yourself. In my case that was really easy. (Laughs) But all my people have a great sense of humor.
We look at spouses too. I don't need marital problems as a distraction. So when we look at a potential employee, we look at the family. We look at more than just the brains. We look at how they interact with everybody. I could get someone really smart, but they could screw up the office. So all my people are very fortunate, we work very well, we cover for everybody. It's a different organization.
When I proposed to the board that I wanted to build out 14,000 square feet of office space for 11 employees - it sounded crazy. But there was a thought process behind it, and the board bought off on it. It was that people will move jobs to get a better view. Not because it was a better deal, but because they got a corner office. I had the views. So I built nice, private offices. But I also knew when you do it on paper, you get the figures - 100 square feet per employee, sitting in cubicles. One thing I know about cubicles is the same thing with public housing: you crunch so many people into a small space, at some time it's going to blow. You're going to have turnover; somebody's voice is too loud, someone's a whiner. Whatever it might be. The other thing is if you're in a cubicle, you have a meeting, you're going to go into a conference room. When people go to a conference room, they go for the duration. They don't go to make a quick decision. With oversized offices, they can multitask. Then three or four people can sit, take an idea, make a decision, and go on. Another thing is, we can't afford people going to lunch. But because the space is 14,000 square feet, when you go down to another office it's as if you've walked outside. The walls have been there 10 years. We haven't needed to replace the carpet, or paint the walls, because it's so big you never hit them, and you never use the same traffic pattern.
My lease keeps going down. That's because, do you want 14,000 square feet? It's going to have to be ripped out, because no one is going to use our concept. So I get so much productivity out of my people, and they enjoy what they do.
Since you've started the fund, what's been the toughest lesson that you've had to learn?
We really haven't hit a rough patch. I know that in March '09, our assets got down to $450 million as the market got cut in half, and there was nothing we could do. All we could do was stay the course. We were telling clients that the market wasn't going broke, there was just panic out there. I learned 36 years ago that you buy quality, you hang on to it, you'll be fine over time. It's time in the market, it's not timing the market.
You look at the market and the way it started out in January, it was down 2.8%, then it came back up to even. It's a trader's market. The ultimate winner is going to be the long-term investor. It's just patience. What one might perceive as a difficulty, another sees opportunity ... Right now there's no euphoria, no panic, and a lot of money on the sidelines.
