Kayne Anderson Rudnick’s Small-Cap Sustainable Growth Strategy outpaced the Russell 2000 Growth Index by 22.42% in 2017 thanks to strong stock selection, according to Envestnet | PMC analysts Mike Gebhardt and Brandon Rick. Plus, this portfolio team “delivered meaningful outperformance in the negative months during 2017,” the analysts say.
Credit for this record should go to Los Angeles-based Kayne Anderson Rudnick’s “consistent approach,” which has three main elements, according to Todd Beiley, portfolio manager and senior research analyst.
First, Kayne aims to find businesses “with very durable competitive advantages,” Beiley says. Second, it wants to find them “at attractive prices.” Third, it seeks to not “over-diversify the portfolio,” which means it focuses on “the most compelling ideas” it finds.
The Small-Cap Sustainable Growth Strategy includes about 30 securities — “businesses with very strong competitive barriers [that] hopefully we can own for many, many years if we do our research correctly,” he explains.
The holdings are picked using a risk-averse framework, Envestnet | PMC analysts’ say, and the managers spend a significant amount of time focusing on limiting the portfolio’s downside risk. International holdings generally represent 20% or less of the strategy.
In 2017, a holding that helped the Kayne team hit it out of the park was Autohome, a Chinese online car business that became part of the portfolio in 2015. “It has the most user-generated reviews, ratings, etc. … There was a network effect, which we thought was very powerful and would protect the business for a long time.”
How did the portfolio team zoom in on this key holding? “We look in places [where] others, hopefully, may not be, and … we do a lot of screening. We go out and visit companies — anyway we can find an idea we are open to it,” Beiley said.
The businesses that the firm reviews tend to be both “more profitable and more resilient than the average company,” he adds. “In tough economic [or] market environments, our portfolio tends to perform much better … than the rest of the market. We’re proud of not only the long-term absolute returns but how we achieve them.”
Analysts say the strategy’s edge is the dedicated research process of its team, which Kayne has been using to manage its investments since 1992. In addition to on-site visits and phone interviews with company managers, the culture at Kayne fosters collaborative thinking, which benefits its strategies, they point out.
These methods helped Kayne’s small-cap portfolio move up about 39% gross last year. And its longer-term record and 10-year results since inception “are very strong as well,” Beiley says. “In terms of healthy absolute returns, we also tend to do well in difficult market periods.”
The portfolio team’s size is critical, he explains, as it gives the group enough resources to do plenty of research and to fully understand the companies it is considering for the portfolio.