Executive Summary / Key Takeaways

• Hennessy Advisors (HNNA) is a niche asset manager focused on actively managed mutual funds and ETFs, pursuing a growth strategy centered on both organic inflows and strategic acquisitions to increase assets under management (AUM).
• The company demonstrated robust financial performance in the six months ended March 31, 2025, with total revenue increasing 45.1% year-over-year to \$19.0 million and net income nearly doubling to \$5.4 million, primarily driven by a significant increase in average daily net assets.
• HNNA's operational efficiency improved, with total operating expenses decreasing to 61.6% of total revenue for the six-month period, down from 74.4% in the prior year, indicating enhanced operating leverage.
• A key strategic move is the pending acquisition of the STF Tactical Growth and Tactical Growth & Income ETFs, expected to close in Q3 2025, which will add approximately \$220 million in AUM and expand HNNA's ETF offerings.
• While facing competition from larger, more technologically advanced firms and lower-cost passive options, HNNA differentiates itself through its in-house research expertise, disciplined investment philosophy, and focus on building strong relationships with financial advisors and direct investors.

The Story of Hennessy Advisors: Growth Through Discipline and Acquisition

Hennessy Advisors, Inc., founded in 1989, has carved out a position in the competitive asset management industry by focusing on a family of actively managed mutual funds and, more recently, exchange-traded funds. Based in Novato, California, the company's core business revolves around providing investment advisory and shareholder services for the Hennessy Funds. Unlike some larger competitors that emphasize vast scale and passive strategies, HNNA's approach is rooted in a consistent and disciplined buy-and-hold investment philosophy, often leveraging in-house research for portfolio management. This strategic focus aims to provide investors with long-term investment solutions, appealing to those who value active management and specific investment strategies.

The company's growth strategy is two-pronged: fostering organic growth through asset retention and attracting new inflows, and pursuing strategic acquisitions of other fund management assets. This acquisition history is a significant part of HNNA's narrative, with the company having completed 12 purchases of assets related to the management of 33 investment funds over time. These transactions are central to increasing the company's assets under management (AUM), which directly drives its revenue.

In the competitive landscape, Hennessy Advisors operates alongside much larger players like BlackRock (BLK), T. Rowe Price (TROW), Franklin Resources (BEN), and Invesco (IVZ). These industry giants often possess advantages in scale, brand recognition, and technological infrastructure. For instance, firms like BlackRock leverage sophisticated platforms such as Aladdin, which can offer significant operational efficiencies and technological differentiation in areas like risk management and portfolio construction. While HNNA does not highlight a proprietary technology platform on the same scale as Aladdin, its differentiation lies in its investment methodology – the disciplined, research-driven approach applied by its portfolio managers (both internal and sub-advised under HNNA's oversight). This "technology" of investment selection and portfolio construction, guided by a consistent philosophy, is the core operational engine aiming to deliver performance. The company also utilizes a robust marketing automation and CRM system to support its sales and retention efforts, serving a large network of financial advisors and direct investors, which is a critical operational tool for organic growth in a competitive market.

Recent history underscores HNNA's commitment to its growth strategy. In fiscal year 2024, the company completed two asset purchases from Community Capital Management, LLC, adding approximately \$12 million and \$59 million in AUM, which were integrated into the Hennessy Stance ESG ETF. Looking ahead, a definitive agreement was signed on March 14, 2025, to acquire the assets related to the management of the STF Tactical Growth Income ETF and the STF Tactical Growth ETF, with combined assets of approximately \$220 million. This pending transaction, expected to close in the third calendar quarter of 2025, is explicitly aimed at significantly expanding HNNA's ETF offerings and strengthening its position in that market segment, complementing its existing lineup. The strategic rationale includes welcoming an experienced portfolio manager, Jonathan Molchan, to the team and structuring the transaction as a tax-free reorganization for the acquired ETF shareholders.

Financial Performance Reflecting Growth and Efficiency

The first half of fiscal year 2025, ended March 31, 2025, demonstrated the positive impact of increased AUM on HNNA's financial results. Total revenue for the six months surged by 45.1% to \$18.984 million, up from \$13.084 million in the prior year period. This increase was primarily fueled by a substantial rise in average daily net assets of the Hennessy Funds, which grew by 47.3% to \$4.80 billion for the six months ended March 31, 2025, compared to \$3.25 billion in the same period of 2024. Investment advisory fees, the largest revenue component, increased by 46.5% to \$17.734 million, while shareholder service fees grew by 27.2% to \$1.250 million.

This top-line growth flowed efficiently to the bottom line. Total operating expenses increased in dollar terms by 20.2% to \$11.703 million for the six months, but decreased significantly as a percentage of total revenue, falling from 74.4% to 61.6%. This indicates improved operating leverage, meaning revenue grew faster than expenses. Compensation and benefits expense increased by 32.1% to \$5.440 million, primarily due to higher incentive-based compensation. General and administrative expenses rose by 8.3% to \$3.452 million, driven by increased commission expense on fund sales. Fund distribution and other expenses also increased, largely in line with the growth in average daily net assets. Sub-advisory fees increased by 10.6% to \$2.165 million, reflecting higher AUM in sub-advised funds.

Interest income decreased slightly due to lower interest rates, while interest expense saw a minor increase related to the amortization of issuance costs on the 4.88% Notes due 2026. Income before income tax expense more than doubled, reaching \$7.523 million compared to \$3.766 million in the prior year period. Income tax expense increased proportionally due to higher pre-tax income and a slightly higher effective tax rate (28.0% vs. 27.2%), influenced by the location of investors.

Ultimately, net income for the six months ended March 31, 2025, saw a remarkable 97.7% increase, climbing to \$5.417 million from \$2.740 million. Basic earnings per share rose from \$0.36 to \$0.70, and diluted EPS increased from \$0.36 to \$0.69. For the most recent quarter (three months ended March 31, 2025), net income increased by 67.7% to \$2.583 million, with diluted EPS at \$0.33 compared to \$0.20 in the prior year quarter.

As of March 31, 2025, total assets under management stood at \$4.30 billion, a 10.5% increase from \$3.85 billion a year prior. This growth was attributed to net inflows, market appreciation, and the CCM Funds acquisition. While the six-month period saw overall net inflows into the funds, the most recent quarter experienced significant net outflows in certain funds, notably the Hennessy Cornerstone Mid Cap 30 Fund (\$171 million outflow) and the Hennessy Focus Fund (\$107 million outflow), partially offset by inflows into funds like the Hennessy Midstream Fund (\$3 million inflow in the quarter). Redemptions as a percentage of AUM increased in the most recent quarter compared to the prior year quarter, highlighting the sensitivity of AUM to investor behavior.

From a liquidity standpoint, HNNA appears well-positioned. As of March 31, 2025, cash and cash equivalents totaled \$67.60 million. Net cash provided by operating activities for the six months ended March 31, 2025, was \$5.979 million, a significant increase from \$2.289 million in the prior year, primarily due to higher net income. Management believes current liquid assets are sufficient to meet capital requirements for at least the next year and longer-term needs, although they may seek additional financing if necessary. The principal liability remains the \$39.640 million (net) outstanding on the 4.88% Notes due 2026.

Competitive Dynamics and Strategic Positioning

Hennessy Advisors operates in a highly competitive industry characterized by diverse players and strategies. Compared to behemoths like BlackRock with its massive scale and technological dominance (TTM Operating Margin ~43%, TTM Revenue Growth ~14%), HNNA is a much smaller, more focused entity (TTM Operating Margin ~36%, TTM Revenue Growth ~3%). While HNNA's TTM operating margin is respectable and shows recent improvement, it still trails the efficiency leaders in the industry. Larger firms benefit from economies of scale in distribution, technology, and compliance, which can translate to lower operating costs per dollar of AUM and potentially greater pricing power or flexibility.

HNNA's competitive advantages lie in its specific investment strategies, its in-house research capabilities for certain funds, and its established relationships with financial advisors and direct investors. The company's disciplined, buy-and-hold philosophy and focus on specific market segments (like the Cornerstone funds or sector-specific funds) serve as its core differentiation against broad-market passive options offered by firms like Vanguard or the sheer scale of active management across diverse strategies seen at T. Rowe Price (TTM Operating Margin ~33%, TTM Revenue Growth ~9%). HNNA's ability to generate positive long-term returns in its funds, as noted in performance data (13 of 17 funds positive over 12 months, all 17 positive over 3 years, 16 funds positive over 5 and 10 years), is crucial for retaining assets and attracting new investors in a performance-driven industry.

However, HNNA faces significant competitive disadvantages due to its smaller scale. This can lead to higher operating costs relative to AUM compared to larger peers. The lack of a proprietary, industry-leading technology platform like BlackRock's Aladdin means HNNA must rely on a combination of internal systems and third-party service providers, potentially limiting efficiency gains compared to competitors who can leverage advanced tech for everything from trading execution to client relationship management. Indirect competitors, including robo-advisors and low-cost index funds, also pose a threat by offering simpler, cheaper alternatives that appeal to a segment of the market, potentially diverting AUM away from actively managed funds like those offered by HNNA.

HNNA's strategic response to these dynamics is evident in its continued pursuit of acquisitions to gain scale and expand its product lineup, particularly in areas like ETFs, as seen with the pending STF ETFs purchase. Simultaneously, the company invests in its marketing and sales infrastructure, including its CRM system and advisor relationships, to drive organic growth and asset retention. The focus on building loyalty among financial advisors, including those with significant positions in Hennessy Funds, is a key operational strategy to counter the scale advantages of larger competitors.

Outlook and Key Considerations

Management remains focused on delivering strong investment performance and providing high-quality customer service, recognizing these as fundamental to success in the asset management industry. The strategic emphasis on acquisitions is expected to continue, aiming to increase AUM and diversify product offerings, such as the planned expansion in the ETF space with the STF ETFs acquisition. Organic growth efforts, supported by marketing and sales initiatives targeting financial advisors and retail investors, are also central to the outlook.

The macroeconomic environment presents both opportunities and challenges. While market appreciation has contributed positively to AUM, investor sentiment is influenced by factors like interest rates, inflation, and economic growth prospects. Management notes that investors are anticipating a softening economy and potential rate cuts by the Federal Reserve, while inflation remains above the Fed's target. These conditions can impact market volatility and investor flows into different asset classes and fund types.

Key risks for HNNA include the inherent volatility of the stock market and its direct impact on AUM and fee revenue, the risk of significant redemptions from the funds (which increased in the most recent quarter), intense competition from a wide range of financial institutions, and the potential for increased regulatory burdens and associated compliance costs. The success of future acquisitions, including the pending STF ETFs transaction, is also subject to execution risk, including obtaining necessary approvals and successfully integrating the acquired assets and personnel.

Specific quantitative financial guidance was not provided. The strategic direction is clear: grow AUM through targeted acquisitions and organic efforts, maintain focus on investment performance and service, and manage expenses to preserve operating leverage. The recent financial results demonstrate the potential for significant earnings growth when AUM increases, highlighting the operating leverage inherent in the asset management business model.

Conclusion

Hennessy Advisors presents an investment narrative centered on a disciplined, actively managed approach within the competitive asset management sector. The company's history of strategic acquisitions, coupled with ongoing efforts to drive organic growth through strong advisor relationships and marketing, positions it to increase its asset base. The recent financial performance, particularly the strong revenue and net income growth driven by higher AUM and improved operating leverage in the first half of fiscal 2025, underscores the potential profitability of this model when market conditions and inflows are favorable.

While facing formidable competition from larger, more technologically advanced firms and the persistent pressure from lower-cost passive options, HNNA differentiates itself through its specific investment philosophies and dedicated service model. The pending acquisition of the STF ETFs highlights the company's commitment to expanding its product suite and gaining scale. The key for investors lies in monitoring HNNA's ability to continue attracting and retaining assets in a dynamic market, successfully integrating acquired businesses, and maintaining its operational efficiency amidst macroeconomic shifts and competitive pressures. The focus on disciplined investing and strategic growth initiatives forms the core of the investment thesis for HNNA, with recent results providing a tangible demonstration of its potential.