Hennessy Advisors Inc.

The tidal flow of money into passive investment strategies tracking index funds, particularly the S&P 500 has dented the active money management business.

Hennessy Advisors Inc (HA) operates 16 open-ended mutual funds of which only one tracks an index. HA earns money via investment advisory fees, and shareholder service fees. Investment advisory fees range between 0.75% and 1.25% of the assets under management (AUM) and shareholder service fees (which includes administrative services for redemptions/change of fund options, etc.) amounts to a flat 0.1% of AUM. Management of six of the sixteen funds are outsourced to sub-advisers who charge between 0.27% and 0.42% of AUM.

Most of the funds are divided between quantitative strategies and actively managed portfolios. Every fund, except for HA’s Japan fund and Focus fund have lagged their relevant benchmarks and indices over 3, 5, and 10-year terms. These two outperformers contributed 42% and 12% of HA’s revenues. The third highest contributor (10% of revenues) is the only index fund, which tracks natural gas distribution utilities (AGA stock index).

The entire business model of HA is dependent on its AUM. This has fallen from $6.7bn in 2016 to $4.9bn today – likely due to the relentless move to passive strategies and poor performance by most of HA’s funds.

HA generated $41m in sales and net income of $10.6m in the last twelve months. This equates to earnings per share of $1.38. The most recent quarterly dividend was $0.1375 per share equating to a 40% payout ratio.

HA operated with a net cash position of $5.5m. All the debt was paid off on March 26^th when the uncertainty of Covid-19 was taking hold.

The stock sells for $60m or $8 per share, which is less than 6x earnings sporting a 6.9% dividend yield.

AUMs are fleeting as speculators chase the hottest short-term performers. However, the client base is diversified with over 250,000 mutual fund accounts served by 18,500 financial advisers. Though the trend of AUM is downward, it may be foolhardy to predict a never-ending decline.

At the current price and a 17% earnings yield, there appears to be a reasonable margin of safety for the investor to take his chances on the stock as part of a diversified portfolio.