Neil Hennessy is chairman, chief investment officer and founder of Hennessy Funds, a mutual-fund company based in Novato that was founded in 1989.

The company, with 23 employees, has 14 funds, including five domestic equity funds, three that include some bonds, and six sector and specialty funds. Hennessy Advisors, a separate company that is publicly traded, is the investment manager that services and markets Hennessy Funds.

North Bay Business Journal interviewed Hennessy on April 4.

What is the current valuation of total assets of Hennessy Funds, near $7 billion?

We are at about $6.7 billion.

In the last month or so, the market has shown renewed volatility?

All we hear is that we’re in the ninth year of the bull market and it has to end. Nobody gives any reasons why it should end. When you look back at the 1982 to 2000 period, it (market) was up each year with the exception of 1990, when it was down half of one percent. In the beginning of that period, we had 18 percent inflation and 21 percent interest rates.

In October 1987, we lost 25 percent (22.6 percent) of market value in one day. Unbelievable. The Nasdaq was up 86 percent in 1999, euphoria. We knew that was going to come to an end. There is no euphoria in this marketplace.

If we were to bring Alan Greenspan (former Fed chairman) in here, he would not say there is “irrational exuberance”?

No. Absolutely not. There is no euphoria. They call me the ultimate bull. There was euphoria that crept into the real estate marketplace in 2004, 2005. (Buyers put) no money down, didn’t have to qualify. The euphoria went away (with drop of nearly 45 percent in some markets). In 2008 and early 2009, (many) banks went (or appeared to go) broke. They weren’t broke.

Bank of America made a good deal to buy Merrill Lynch during that crisis, in 2009 (all-stock deal initially $50 billion that turned out closer to $20 billion)?

Yes. But in late 2008 and 2009, customers were still able to go to the bank and get cash, write checks and have them cashed.

Everything worked in most banks?

Everything worked. When I look at today’s market, corporate earnings have been very healthy through a difficult regulatory climate. Businesses figured out how to continue to make money.

How to manage Dodd-Frank (Wall Street Reform and Consumer Protection Act, 2010)?

Bankers had to incorporate it and figure out what to do.

It made banks with less than about half a billion dollars in assets hard to manage because of the cost of compliance?

Big business loves regulation. They have all the people to do it. It affects small businesses. More regulation puts small businesses out of business. We already had disciplinary measures in place, especially in the securities industry.

The market (Dow) is at about 24,000. Could we go to 30,000 or 40,000?

We are on the way to 30,000.

How long? Two years?

In the next three to five years. The Dow Jones is selling for about 19 times earnings. You take into account the new tax law (corporate taxes dropped this year from 35 percent to 21 percent) and we are at 15 to 17 (times earnings) range.

The tax reduction was a huge boon?

Right. If you look back at the late 1990s, early 2000, the Dow was selling at 30 times earnings. We are so far away from having euphoria in this marketplace. Bitcoin was euphoria (soared from $1,000 early 2017 to $20,000, now <$7,000). If you buy quality (stocks) and hang onto it, over time you are going to make money. We’re going to have a correction. Between 2010 and 2017, we had 18 corrections, with 14 of them between 5 and 10 percent. We haven’t had a correction since February 2016.

It can be a good thing because it knocks fluff out of the market, allows people to reorient?

In the last two years there has been talk that low fees are best for the shareholder, the investor.

You have 14 funds, all no-load?

They are not load, but there are management fees and expense ratios. Vanguard will manage an index fund for four basis points. You can’t make any money. They kept harping that low fees are the best. Investors went to passive S&P 500 indexes or ETFs (exchange-traded funds). They attracted hundreds of billions of dollars. They all own the same stocks in the same percentage.

That’s likely true for Vanguard, Fidelity, other big funds?

They’re exactly the same as Vanguard. When you get a selling wave, there’s nothing they can do. They have to sell. If Fidelity is selling, so is Vanguard, so is BlackRock (Funds), so is Schwab. Selling waves scare the retail investor. The market was down 1,032 points.

You’re talking about the day about two months ago?

Yes. I have two sons who work here. I told them to enjoy it. It’s not ending the bull market. If the market comes down 5,000 points, does that mean Exxon is going out of business? Google? Nobody is going out of business. There’s no reason to get scared.

The new law brought corporate taxes from 35 to 21 percent. Will a lot of that money go back into stock repurchases?

If a company saves $1 billion, a smart businessman takes $500 million and invests in organic growth or acquisitions, raises dividends or buys back stock. If it doesn’t work, you still have $500 million that can come into earnings in a year or two. That’s the smart way to do it. You will see wages go up, mergers and acquisitions. We are getting toward an equal playing field.

You’re referring to an equal playing field with our corporations and foreign companies?

Yes. They could come and bid up an American company. We couldn’t because our taxes were too high.

It was crazy?

Absolutely crazy. Now they lowered it. California is going to run into a big problem.

With the state tax so high?

The state tax is so high that, between sales tax, corporate tax, individual tax, they’re taxing people out of here.

Smart business owners go to Nevada?

People are moving out, saying forget it.

What are you doing here in Marin?

Family. If it wasn’t for family and friends, I’d probably be gone.

Hennessy Funds grew to $1 billion by what year?

In 2006 we were $2 billion. The market collapsed. We were $1 billion in 2008. In 2009, we went from $1 billion to $400 million back to $1 billion. That was from two acquisitions in 2009.

You did a big acquisition with FBR (Funds) in 2012, went from roughly $1 billion to $3 billion?


You tripled your size in one move?

The headlines were, a minnow swallows a whale. They had 10 funds. We had nine. It doesn’t matter how much money you manage. It’s the number of funds you have. Each one is a separate company. We merged some into ours. Over the years we have made nine acquisitions with 28 mutual funds for about $3 billion in assets. We’re still looking.

Roughly half the funds you have now are sector funds, including two in Japan. Are those your hottest funds now?

In September 2009, I bought two Japan funds. People thought I was crazy, wanted to throw me in a padded room and lock it. Long term, the story keeps getting better in Japan. They wanted to go from 6 million visitors a year in 2009 to 20 million visitors by 2020.

Huge increase in tourism?

Yes. In 2010, they relaxed requirements on Chinese coming in. They come and go as they want if they prove they make $3,000 a year.

Their Chinese tourism rose quickly?

Last year they were 23 million visitors. Chinese are skeptical about buying products in their own country for fear they are knock-offs. They fly over (to Japan, about 3 hours). Airports are turned into shopping malls.

Let people spend their dollars or yen at the airports?

San Francisco at Terminal 2 is all stores. It used to be a place to get breakfast and lunch, a bookstore. Japan started that (retail trend). In 2020, they have the summer Olympics (Tokyo). The world is going to see how beautiful Japan is, how good the food is, how safe it is.

Much better than big cities here?

Right. Any place in the world. Japan is putting money into infrastructure they can use in the future — transporting people. It’s a story that’s going to get better. Inflation is going to creep in. They were in a deflationary cycle for many years. Japanese weren’t spending their own money.

Are Japanese typically less willing to take stock risk than investors here?

They got out of the market completely. Now they can put up to $50,000 in equities tax-free for 10 years.

There’s no tax on capital gains?

None. They wanted to pull money back into the market, get young people in.

Your natural-gas sector fund is invested how?

It is pipelines, delivery systems of natural gas to homes, not exploration. It is not utilities. It’s an American Gas Association index (fund). Sectors go back and forth all over the place, what’s hot, what’s not.

What’s your favorite fund?

I like the mid-cap sector. They are large enough to weather an economic tsunami and to acquire a smaller company that would be accretive to them. They’re also small enough to be bought, and accretive to a larger company. They can be a buyer or seller.

They are much less volatile than a small-cap?

There is a lot of risk on a small-cap.

How do you define mid-cap, what revenue range?

$5 billion to $10 billion.

How big was Rainier (U.S. Equity Funds, completed January 2018)?

About $400 million.

Do you consider an exit plan for this business as being acquired by another company?

We went public (Hennessy Advisors) in 2002. We have grown organically and through acquisitions. But we are building the company to sell it. You can always say no.

What is the typical fee structure for Hennessy Funds?

An expense ratio is charged to the fund on a daily basis. We might charge 75 basis points or three-quarters of one percent to manage your money. You add in SEC fees, accounting fees, legal fees, printing the prospectus — it gets expensive. The fees are very low.

Your investors are countrywide or primarily Bay Area, North Bay?

We have about 325,000 shareholders nationwide. About 93 percent of our sales go through RIAs (registered investment advisers). Most of the people in the balanced fund are local (half the money in one-year treasuries, half spread across shares of the 30 Dow companies). That (balanced) fund, our first fund, has $12 to $15 million. It has never grown. There is only $20 million of local money in our funds from Sonoma and Marin counties. Tiny. We are a small company in Novato, but you see the Hennessy name in national media.

What’s the market cap for Hennessy Advisors?

About $150 million. We are selling at about 8x earnings.

Where do you invest your personal money?

I divide it in equal dollar amounts among all 14 Hennessy Funds. At the beginning of each year, I reallocate in equal amounts.

You are an index thinker in terms of how you allocate your own money?

I just don’t know which sector is going to do well. If it’s good enough for our shareholders, it’s good enough for me. My net worth is here. I own 30 percent of Hennessy Advisors, a public company.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257.