These managers pick stocks once a year. Here’s what keeps them busy

For a seemingly hands-off strategy, it’s racked up an impressive track record. The US$1.9 billion mutual fund gained 34% last year, beating the S&P 500 index’s 25% return. From its inception in 2003 through Feb. 12, its average annualized return topped the benchmark by a hefty 1.58 percentage points.

Indeed, charting the fund’s performance over its lifetime shows it’s been ahead of the S&P for most of the past 20 years—with a couple of exceptions, such as a plunge in 2020, early in the pandemic.

Setting aside the active-versus-passive debate, another question comes to mind: What exactly do the fund’s managers do all day? To find out, we spent a morning and early afternoon in December with Ryan Kelley and L. Joshua Wein in Chapel Hill, North Carolina.

7:55 a.m.

A low, white sun is trying to burn the fog off a golf course behind the complex where Hennessy managers work, a mixed-use development that includes condominiums, shops and office suites on the outskirts of the college town.

On the third floor, Kelley, 52, is doing the morning reconciliation, he explains. Spreadsheets are open on his two monitors. Because Hennessy is responsible for the accuracy of the net asset values at which its mutual funds trade, Kelley checks the data the company gets from its custodian and fund accounting provider, U.S. Bancorp. “They come up with what all the positions are for all the funds,” he says. “We’re essentially checking that our information matches their information.”

Kelley pulls up another sheet showing cash flows into and out of each share class of Hennessy’s 17 funds. The funds generally aim to hold cash at a certain level so they can meet redemptions. But when a fund sees net inflows from investors and cash gets too high, they have to buy more shares. “One of our funds is getting up near a 4% cash level,” he says, pointing to a cell on the right side of the sheet. “And we like to keep that fund between 2% and 3% cash. So Josh will put in a trade.”

“We have a lot of hats,” Kelley adds. “Some firms, there’s no way that a portfolio manager would have anything to do with this kind of stuff.”Hennessy Advisors Inc., the publicly traded investment manager that oversees about $5 billion in the Hennessy funds, has only 18 employees.

Five are portfolio managers: Kelley and Wein in North Carolina; Neil Hennessy, the founder and chief executive officer, at the company’s headquarters in Novato, California; David Ellison, who manages financial funds, in Boston; and Ben Cook, who runs energy funds, in Dallas. Hennessy has no analysts or dedicated traders, so some of the portfolio managers take turns doing the firm’s trading.

And recordkeeping. “We have individual sheets for each of our funds,” Kelley says. “So I’m saving PDFs of every single individual fund every single day.” In years past, he says, these reports would get printed out and accumulate in the office of Hennessy’s compliance officer. “He had, like, a whole wall stacked full of papers. But now we do everything with PDFs.”

9:08 a.m.

In the office next door, Wein, 51, is getting ready to do a trade. He pulls up a spreadsheet with the Mid Cap 30 fund’s positions, showing the current weights of each. At the rebalance, which took place over a couple of weeks in October and November, each stock started at a 3.3% weight.

Since then, of course, the shares have moved. Wein scans the sheet. “Peloton [Interactive Inc.]—I think that’s our big winner so far,” he says, referring to the New York-based fitness company. “Peloton is almost 6%.” On the other hand, a stock that’s dropped is Insight Enterprises Inc., an information technology company in Chandler, Arizona, which is at 2.2% of the portfolio.

The spreadsheet is set up so that, given an amount of new money—in this case, $8 million—it will calculate how much should be invested in each name at their current weights. Asked why not equal-weight the buys, Wein notes that share price performance is an important component of the formula the fund uses to pick stocks.

“The stocks that go into the portfolio are a function of earnings growth and valuation, but also momentum,” he says. New money coming in is another layer of momentum: “Whatever’s doing well, we’ll add to that,” he says.

The Mid Cap 30’s formula isn’t secret. In effect, it drills down to stocks that rank highly on three factors: value, growth and momentum. The managers start by screening for US companies with a market value from $1 billion to $10 billion. (That was considered mid-cap when the fund started two decades ago; the lower bound of the category has shifted up since then.)

Then they take the following steps. Whittle the list to those trading at a price of 1.5 times revenue per share or less.

That’s the value factor. (Hennessy uses sales rather than earnings because revenue is less vulnerable to manipulation.) Filter for names with higher earnings than the previous year. That’s growth. Drill down to the ones whose prices are higher over the past three- and six-month periods. Momentum. Then sort by one-year price appreciation and pick the top 30.

Wein selects a section of the spreadsheet and drags and drops it into an electronic order sheet on another screen, where it populates a ticket that he can route to a broker. “It shows up here—31 buys,” he says.

Thirty-one? Wein explains that MDU Resources Group Inc., in Bismarck, North Dakota, which was part energy utility, part construction company, spun off Everus Construction Group Inc. to shareholders in November.

“We bought it as the combined entity, MDU. And in the case of a spinoff or spinout, we keep it,” he says. “I feel like every year there are 31 names, because one of the 30 spins something out.”

In the order sheet, Wein uses a drop-down to pick Cowen as the broker. (Cowen & Co., now TD Securities, was acquired by Toronto-­Dominion Bank in 2023.) The fund, which doesn’t use sell-side research provided by brokerages, routes trades to nine brokers, cycling through them based on a ranking of their performance in getting the best prices.

A message pops up in the chat: The trader is going to do “50% POV,” referring to a strategy of algorithmically targeting a specific percentage of market volume over a period. Wein says sell-side traders all seem to love their job, and this one is particularly passionate. “He’s one of the only ones, I think, that sometimes try to get a bunch done at the open and then the rest throughout the day,” he says. “We let him do what he wants.”

The Hennessy managers evaluate brokers in several ways. One is by running a pre-trade simulation in a software package that they compare with the actual execution, Wein says. Kelley adds that among the most important metrics they track is interval VWAP, the ­volume-weighted average price over the time period their order is being worked.

That means “when they got it to when they finished it,” he says. “If we gave them the trade at 11 o’clock and they ended at 2 o’clock, did they get good prices for it?”

Because the fund is looking to own stocks for a year, the managers don’t try to time the market, Kelley says. “When we do our rebalance over three or four weeks, sometimes some of the brokers will be like, ‘Oh, the stock’s up 10% today. Why are you buying it?’ ” he says. “And then it’ll be down 30% the next day. Because we do it over three or four weeks, we’re just more interested in the average price.”

A look at at the computer screen shows the order has been filled for one of the stocks: Brinker International Inc., the Dallas-based operator of Chili’s and other restaurants. “Probably one of the more liquid names,” Kelley says.

The broker has provided a pre-trade report showing that most of the trades are less than 1% of average daily volume; that means there’s little risk the order will move the market, hurting Hennessy’s ability to get a good price. One trade, however, is 1.36% of average daily volume: World Kinect Corp. “That’s our least liquid stock,” Kelley says. What is it? An energy logistics company in Miami.

“Obviously, there’s a limit to how much Bloomberg or CNBC can talk about on TV, but you know, names like this just don’t get talked about,” Wein says. “It’s just amazing how many public companies there are that no one’s ever heard of. And they do interesting things—especially service-based companies and contractors.”

Construction, he notes, is a very fragmented industry. No company controls building like a tech giant might control artificial intelligence chips.

10:30 a.m.

Kelley and Wein also run the Hennessy Gas Utility Fund. The $500 million fund tracks an index compiled by the American Gas Association, a trade group for natural gas utilities. When the fund started in 1989, it was made up of 140 tiny companies, Kelley says, all natural gas utilities.

Now it also includes utilities that use gas for some part of their electricity generation. “It’s definitely transformed over the years,” he says. “It’s also major pipeline companies like Kinder Morgan [Inc.] and LNG, so Cheniere Energy [Inc.].” In 2024 the institutional share class of the fund gained 25.3%, also beating the S&P.

The managers gather in Kelley’s office for a call with a team at Harborside Group in Baltimore, which handles institutional sales of the fund. They’ve submitted questions to Kelley and Wein ­beforehand, and the managers take turns talking through them.

What surprised you the most in 2024 as it relates to natural gas utilities? “No. 1,” Kelley says, “is the outsize returns that we saw with natural gas and utilities in general. Doing so well versus the overall market is really nice to see.”

He goes on to talk about how the price-earnings ratio of the sector rose and, most surprising, how utilities increased earnings per share. All of the capital expenditure that’s gone into pipeline replacements and grid improvements is translating into 19% earnings growth in the industry in 2024.

How might the Trump administration’s energy policies impact gas demand and liquid natural gas? “So, obviously we’ll know for sure in a month or so,” Wein says. “But it seems like the Day 1 priority, other than immigration, is energy policy.”

He points to a repeal of clean power standards that relate to electricity generation. “The idea of getting rid of coal and natural gas in the production of electricity, that will probably go away.”

How will increased electricity demand from AI development affect natural gas usage? To start, Kelley notes that energy demand is surging because of AI, pointing to a recent article. “It takes 10 times more energy to do one ChatGPT search versus one Google search,” he says.

The projection is that in the US, data centers will account for 8% of power use by 2030. To meet the increased demand, the new nuclear capacity tech giants are talking about will take time to build out. “It’s going to be natural gas that really drives most of it,” he says.

11:55 a.m.

An early lunch. The managers and a reporter stroll over to an Asian fusion restaurant at one end of the complex, where the daily specials are a bento box and locally caught trout.

1:35 p.m.

Hennessy Advisors was founded in 1989 and started its first mutual fund in 1996.

It then bought two Cornerstone mutual funds in 2000 from O’Shaughnessy Asset Management, the firm then run by ­investor and author James O’Shaughnessy. “He had this book, What Works on Wall Street, that talks about fundamental quantitative investing,” Kelley says. The idea in the book, first published in 1996, was to look at four decades of returns data and try to figure out which metrics—price to sales, for instance—actually mattered to performance.

To develop the Mid Cap 30 fund, Neil Hennessy took the process of the Cornerstone Growth Fund, added the mid-cap size constraint and concentrated the number of stocks to 30 from 50, Kelley says. He pulls out a 20-year-old clipping from the Washington Post that quotes Neil Hennessy about the Growth Fund:

“How did I know to get into home builders?” Hennessy asks himself. “I didn’t. They come to us.” What he means is that the formula determines the stocks. He doesn’t pick them.

“This is 2002,” Kelley says. “And it sounds like what we could have said yesterday.” The process stays the same, he says.

When the managers describe their process on calls with registered investment advisers and their research teams, Wein says, people will sometimes say, “Anyone could do this.” Wein’s take: They could, but for most people the temptation to tinker with it would be strong.

By contrast the Hennessy managers are, in effect, constrained to stick with the process by its explicit description in the fund’s prospectus. They couldn’t decide to try 28 stocks instead of 30 without rewriting it, he says.

Has the formula ever spit out a stock that gave the managers pause? Yes, but they’ve never overruled it. “Trust me, we’ve seen some companies, we’ve been like, ‘Does this really make sense?’ ” Kelley says. Some years the formula produces a concentration in a sector or industry. One year it was four homebuilders, Wein says, accounting for 13% of the portfolio.

Another year there were at least two recreational vehicle manufacturers. That’s a highly specific bet, Wein says, that no discretionary portfolio manager would ever come up with. “OK, gas is going to plummet, everyone’s going to want to drive around the country in RVs.” A manager who believed that would typically take a position in a single RV maker.

“Energy is a good example of how this formula works,” Kelley adds. At one point energy accounted for as much as 30% of the fund. It started when oil prices were around $40. None of the oil companies were making much money.

“Their p-e’s were too high because their earnings were so small, they’re out of favor, nobody wants them,” he says. “But price to sales, they were really cheap.” As oil started to run up toward a high of $120 in 2022, energy companies’ profitability and share prices started jumping.

2 p.m.

A “Breaking News” graphic flashes across the TV in Wein’s office, and an anchor comes on to announce that the Federal Open Market Committee has cut rates by 25 basis points. “It was to be expected,” Wein says.

He scans worksheets that track the performance of ­Hennessy’s funds. “Now the market’s sold off and we’re down a little bit. Not a big deal, but yeah,” he says. “It’s interesting because it looks like two cuts now in 2025.”

Kelley says that in their past careers, the Fed news would have sent him and Wein scrambling. He covered banks at FBR & Co., while Wein was an equity analyst at First Union Securities.

“If there was news, you better call that company immediately, and then you better tell the trading desk what’s going on,” he says. Running the formula-based Hennessy funds, “the nice thing about this process is, yes, this affects our funds, but we don’t have to react to it.”

Jon Asmundsson, Bloomberg News