April 11, 2012

2012 Small-Cap Equity SMA Manager of the Year: Kayne Anderson Rudnick

‘Research is our lifeblood,’ says fund manager Jon Christensen, and that has helped the firm weather the rocky ride in the small-cap space

Jon Christensen

(Jon Christensen of Kayne Anderson Rudnick)

2012 Small-Cap Equity Manager of the Year

Kayne Anderson Rudnick
Small-Cap Growth Portfolio

This is an expanded profile of one of Investment Advisor-Prima Capital's 8th annual Separately Managed Account Managers of the Year. View the complete article with all the winners here. Read about the process of choosing this year's winners here.

To say it’s been a wild ride in the small-cap space is an understatement, which makes Kayne Anderson Rudnick’s victory in the small-cap equity category all the more impressive.

“We’ve weathered it well,” says small- and mid-cap manager Jon Christensen matter-of-factly. “Research is our life blood; we view ourselves as analysts as well as portfolio managers, and because of our position, we usually talk directly with CFOs at the companies we buy on a consistent basis.”

Christensen and his team (which includes co-managers Bob Schwarzkopf and Todd Beiley) look for 25 to 35 stocks that have a sustainable competitive advantage and can develop, protect and nurture their market share.

“We like them to have niche dominance and be self-financing, which leads to high cash flow and low amounts of debt,” he adds. “This allows them to generate good returns in good market cycles as well as bad.”

And of course he looks for a strong, competent management team, people who are good stewards of cash.

“A lot of these firms have a large amount of cash, and how they handle that cash is very important to us,” Christensen says. “There are typically a few things they can do; declare a dividend, buy back shares, reinvest in the business or look for acquisitions. Reinvesting to grow the business is most important to us while acquisitions are the least.”

The team, he says, are typical growth investors, but they don’t look at the magnitude of growth, because a high magnitude of growth too often can’t be sustained.

“Our goal for our investors is to get the returns of the asset class with a lot less risk. How do we do it? We manage risk differently by mitigating business, balance sheet and profit risk, which helps us protect on the downside. We also generate returns differently by focusing on exceptional companies with high returns on capital, great valuations and lots of cash.”

The portfolio typically outperforms in a recession, he says. Coming out of a recession it’s able to “keep up with the market, while in slow-growth environments (like the one we’re in now), the portfolio outperforms as well.

Which is a good thing since, according to Christensen, “we’ll be living with this market for quite a while,” something that is probably of little concern to his clients.

“We’re bottom-up stock pickers that stay fully invested,” he concludes. “No cash. If we can’t find 25 to 35 good investments for our clients, then we’re not doing our jobs.”

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Read about the Prima Capital/Investment Advisor 2011 SMA Managers of the Year.

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