Close Close

Portfolio > Mutual Funds

New Horizons

Your article was successfully shared with the contacts you provided.

Hennessy Advisors President Kevin Rowell knows the mutual-fund industry inside and out, after work at Pioneer, Safeco, Putnam and other firms. He gave Research some of his latest insights recently at a meeting in San Francisco.

Research: Could you tell us about Hennessy? Rowell: Hennessy now has about $1 billion under management right now, and it is strictly a quantitative manager. The shop is led by founder Neil Hennessy and is a strictly formula-driven asset manager. Neil was at the forefront of transparency, and all Neil’s formulas for the funds are on the website and are in every prospectus.

We have traditionally been focused on the U.S. (domestic) retail mutual-fund market, although in the fund, we will be introducing our first separately managed account. Historically, the group has been very successful in the RIA community and in the fund supermarkets, like Schwab, Fidelity and TD Ameritrade.

What is your main focus?The new area, and the reason they brought me on, is to really move to the next level and get involved in the intermediary marketplace, which is roughly about 80 percent of the flow in the marketplace.

My background, having run large sales organizations and large mutual fund companies, is ideally suited to Hennessy right now because the landscape has changed so much.

It used to be that you had to be a big, colossal firm to partner with other big firms. But now because of open architecture, and with clients and advisors requiring best-of-breed performance and most importantly, repeatable performance, any asset manager of any size can now participate in the marketplace with the major firms, the wirehouse firms, the largest independent broker-dealer organizations, the big trust companies, the RIA community. It’s fair game for all of us.

The strategy we are focused on is building a CFA-quality research organization within Hennessy Funds. I have built a team of CFA-qualified research analysts who are only calling on research organizations at all the broker-dealer firms in the country of the types I just described. Before, the advisor would decide what funds he or she liked. That’s not happening anymore. That has all been outsourced to their home office.

Right now, any where between 55 percent to 70 percent of mutual-fund flow is being dictated by these research groups. For example, if you were to look at one of the major U.S. wirehouses, it would have some 20 to 25 research analysts that do nothing but comb over funds and look at attribution and risk measures around mutual funds, separate accounts, etc. And if you can pass their screens, you can get on their approved list and within their model portfolios. Again, that is 55 percent to 70 percent of the flows, and it is being suggested by industry research, that 97 percent of net flow is being dictated by these research groups.

What is your view of this process?If you think about it, this makes perfect sense. Does a large independent broker-dealer with 9,000 planners or advisors really want all of these individuals selling each and every mutual fund product that is out there? Probably not.

From a compliance standpoint, it would rather have a more structured vetting process to make sure these funds are suitable, that they have adequate risk measures, that they are not five-star one day and one-star the next. It really makes perfect sense in the compliance environment that we are in today.

There is the suggestion within the industry that these research-analyst groups or fund-selection units will dictate 80 percent to 90 percent of flows within the next 10 years.

The large asset-management firms can have a large distribution group to call on broker-dealers and other firms and to target the research groups. Small boutique firms are focusing on the research groups, rather then building an army of wholesalers.

What’s your strategy in this context? We’re building a good group of sophisticated CFAs. And essentially what we’ll do is be that one point of contact for those research organizations. Now, this entails a lot, because we have to reengineer every single platform that’s out there.

For example, what if we hear there is a search a firm is doing for a mid-cap blend manager? We need to know not only how our fund would interact with other funds in such a portfolio, we also need to know about all the other competitors who might fill out the model portfolio to determine how our fund would react with all of them. If we are a certain style of manager, like a GARP (growth at a reasonable price) manager and, say, there are nine other funds in the pie chart, maybe they really want a momentum manager in there. You need to know that.

The other thing you need to know is how to meet the buying criteria of those platforms. And they are all different. UBS may ask you completely different questions than Morgan Stanley, and you better know what the firm’s appetite is.

Many research groups tell me that portfolio managers come in with a set amount of time to talk, and the research group would ask for three minutes on the history of the fund firm. In some cases, the portfolio managers go on for 20 minutes about the history of the fund firm. It’s very important to do the needed diagnostic work around this and reverse-engineer.

Hennessy Funds also has an internal sales organization, and we are big believers in what is now known in the industry as hybrid wholesaling. We have everyone centrally located in Northern California, and as needed, we’ll travel out on a monthly basis, when we have to go to significant meetings.

We go to where the money centers are and to where the clients are, and that is a big cost savings. The most expensive way to raise money is this business is to send a wholesaler in to meet with an advisor; the cheapest way is to send the advisor an e-mail. We are exploiting the whole spectrum in between.

We are working with a lot of technology that can push out presentations and video that features our founder Neil Hennessy. And we are having a lot of success getting a lot of our funds on various platforms, such as Merrill Lynch in June. Probably our biggest success story right now is the Hennessy Focus 30 Fund, a mid-cap blend portfolio. It’s just had its five-year anniversary.

It’s been the No. 1 performing fund year to date in the United States and the No. 4 performing fund across all funds.

Neil Hennessy is one of a very few portfolio managers to be, for six years in a row, on the Barrons “Top 100 Fund Managers” list.

The key for us, as quantitative managers, is full transparency for our formulas and a repeatable process that leads to repeatable performance.

Advisors don’t want a fund that’s tremendous one year and horrendous the next year. Advisors just don’t want to disappoint their clients.

Again, our new distribution focus going forward is going to be around the wirehouses and the major independent broker-dealers, the banks and the RIAs.

Why is Hennessy building up a team of CFAs for its distribution? The reason we are relying on CFAs at Hennessy is that the groups we are calling on are all CFA-designated themselves. They, as certified financial analysts, want to speak to others in the same language and don’t want to deal with salespeople. Salespeople may share some information that’s already available online.

These CFAs want to sit down and talk about portfolio construction, attribution analysis, and other important topics. But they don’t want to talk about performance, because they can see that information on their own. It’s the process and the philosophy of the portfolio they want to understand and you can only do that with a CFA-qualified individual.

We are also launching a website just for research analysts. This will have all the attribution that such an analyst would want. This includes information from Zephyr Analytics, for instance, and will feature all our investment policies, our code of ethics and more. This will allow the CFAs to do their homework on our company.

These people are busy, they love to mine data, they love to analyze, and they don’t have time to pick up the phone and talk with someone about proxy voting, etc. Wouldn’t it be so much better for them, if all that information was right there for them? And that’s why we are making it so readily available.

Janet Levaux, MBA/MA, is the managing editor of Research; reach her at [email protected].


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.