Brian Macauley: Well, as the name of the fund suggests, Hennessy Focus Fund, we are both concentrated as well as long-term oriented in our approach. We typically hold about 20 to 30 securities. This gives us an important advantage because it means that we only need to find a handful of new investment ideas per year. That allows us to be more selective in the types of businesses we choose to own, allows us to conduct very thorough fundamental research to understand those businesses and the opportunities and threats in front of them, as well as just giving us the opportunity to be patient, wait for the right entry points, wait for the right exit points from those positions.
Idea Generation Process
Ira Rothberg: We have an eclectic idea generation process. We're always out in the field seeing companies at their headquarters. We go to trade shows. We go to investment conferences. We have a network of like-minded professional investors that we speak with. Over the years we've studied hundreds of businesses. What it allows us to do is narrow down the investment universe from those hundreds of businesses down to a watch list of about 75 companies, where we're always looking for opportunities on that watch list for maybe a short-term hiccup to create a compelling opportunity in one of those watch list names and bring it into the portfolio. So we can be really selective in the 20 to 30 names that we ultimately own for shareholders.
Key Investment Criteria
David Rainey: Over the years, we've developed a blueprint that we run every name through. The blueprint is effectively five key investment criteria that experience has taught us drives the economic performance of the business. The first criteria is one, a high-quality business model with lots of revenue visibility. Number two would be a management team that's not only very strong at running the business, but reinvesting the firm's excess earnings back into the business, or maybe even M&A. The third would be, we're looking for a business with a 10-year plus growth runway in front of it where these excess earnings can be reinvested back into the business. Fourth, we want a business with low tail risk, a business that's not susceptible to regulatory or legal or balance sheet shocks. Then finally, we're looking for an entry point that allows us a discount valuation when we go in. So it's more likely than not that our experience in the stock will mimic its earnings growth over time rather than simply multiple expansion over some short period of time.
Ira Rothberg: We believe there are several layers of risk management inherent in our process. The first and most important is just getting the businesses right. From a fundamental perspective, making sure you have a business with a wide economic moat, that has defensible characteristics. Second is you want to own a diversity of industries. You don't want extreme exposure to any one particular sector or industry. You want to have a diversified portfolio. Then, the third is we think about kind of overlapping factor risks among the portfolio. How does the portfolio react in an environment where inflation picks up, or the unemployment rate picks up, or gas prices spike up? Real-world risks and how do they shock the portfolio. We want to make sure that the portfolio moves forward in a variety of environments.