Equity Investment Strategies

Transcription

1 Equity Investment Strategies Presentation to The National Conference on Public Employee Retirement Systems 2016 Annual Conference A Focus on Quality Since Avenue of the Stars, Second Floor Los Angeles, California T kayne.com

2 Tenets of Quality MARKET CONTROL Ability to Develop, Nurture, Protect its Market/ Effective Competitive Differentiation MANAGEMENT EXCELLENCE Develop and Adhere to Core Competencies/ Disciplined Capital Allocation BALANCE SHEET STATEMENT Low Capital Intensity/ Low Debt Balance Sheet HIGH QUALITY CASH FLOW STATEMENT High Free Cash Flow/ Self Financing INCOME STATEMENT Durable Earnings Growth/ High Return on Capital 2

3 Source of Quality Competitive Advantage Types of High-Quality Business Models Brand Franchise High Customer Switching Costs Network Effect Scale Cost Advantage Route Density The securities presented on this page are chosen based upon objective criteria. Companies are chosen to exemplify diversification. We typically select companies that operate in large, vast industries, but have overwhelming market share for their particular niches. All information is provided for informational purposes only and should not be deemed as a recommendation to purchase the securities mentioned. It should not be assumed that securities recommended in the future will be profitable. A complete list of portfolio holdings and specific securities transactions for the preceding 12 months is available upon request. Holdings are subject to change. 3

4 Quality & Credit Go Hand in Hand Baa Corporate Spreads vs. S&P High Quality Index Relative to S&P Low Quality Index 375 S&P High Quality Index Relative to S&P Low Quality Index Baa Corporate Spreads Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Data provided is through March 31, Data is obtained from Strategas and is assumed to be reliable. Past performance is no guarantee of future results. 4

5 Portfolio Characteristics Higher Quality, Stronger, More Consistent Growth, & Better Value As of March 31, 2016 High Quality Portfolio* Russell 2000 Index Quality Growth Return on Equity Past 5 Years 14.8% 11.0% Debt Coverage Earnings Variance Past 10 Years 30.9% 88.5% Growth Value Earnings Per Share Growth Past 5 Years 9.8% 9.8% Earnings Per Share Growth Past 10 Years 9.1% 6.1% Dividend Per Share Growth Past 5 Years 11.8% 12.1% Dividend Per Share Growth Past 10 Years 7.9% 4.5% Capital Generation {ROE x (1-Payout)} 9.1% 8.4% Value P/E Ratio Trailing 12 Months 21.1 x 32.0 x Dividend Yield 1.8% 1.6% *High Quality is defined as all stocks in the Russell 2000 Index with an S&P Quality Ranking of B+ and above. Description reflects past results and is not an indicator of future performance results. This material is deemed supplemental and complements the performance and disclosure at the end of this presentation. Data is obtained from FactSet Research Systems and BNY Mellon and is assumed to be reliable. Other principal consultant firms may use different algorithms to calculate selected statistics. Estimates are based on certain assumptions and historical information.

6 Annualized Return Performance by Quality April 1, 1986 to March 31, High Quality Portfolio* 12 Growth 10 8 Russell 2000 Index Low Quality Portfolio* Value Annualized Standard Deviation *High Quality is defined as all stocks in the Russell 2000 Index with an S&P Quality Ranking of B+ and above. Low Quality is defined as all stocks in the Russell 2000 Index with an S&P Quality Ranking of B and below. Description reflects past results and is not an indicator of future performance results. Data is obtained from FactSet Research Systems and is assumed to be reliable.

7 Annual Returns U.S. Small Cap Core Equity KAR Small Cap Core: 2 Negative Years Russell 2000 Index: 8 Negative Years * *April 1, This material is deemed supplemental and complements the performance and disclosure at the end of this presentation. Returns for the Kayne Anderson Rudnick Small Cap Core composite are gross of fees. For further details on the composite, please see the disclosure statement in this presentation. Past performance is no guarantee of future results. Management fees are described in Part II of our form ADV, which is available upon request. Gross annual returns will be reduced by investment management fees and other expenses that may be incurred in the management of the account. Net annual returns have been calculated after the deduction of an assumed maximum annual fee of 1%. The effect on performance would grow at a compounded rate. Over a five-year period, if a $250,000 portfolio had an annual return of 10%, it would grow to $402,628. The net compounded effect of a 1% annual investment management fee would total $17,972 and result in a portfolio value of $384,656. For further details on the composite, please see the disclosure statement in this presentation. Past performance is no guarantee of future results. 7

8 KAR Quality Outperformed It s Quality that Matters Not the Asset Class Inception* to March 31, ,000,000 # of Negative Calendar Years Since ,000,000 14,000,000 KAR Small Cap Core 2 S&P 500 Index 4 Russell 2000 Index 8 NASDAQ Index 6 $16.3mm 12,000,000 10,000,000 8,000,000 Lost Decade + Return for NASDAQ Index = (3.81%) Lost Decade + Return for KAR Small Cap Core = 9.84% $8.3mm $8.1mm $7.6mm 6,000,000 4,000,000 2,000,000 Lost Decade + Return for S&P 500 Index = 0.41% KAR Small Cap Core S&P 500 Index Russell 2000 Index NASDAQ Index *April 1, Lost Decade reflects time period from 1/1/ /31/

9 Disclosure U.S. Small Cap Core Equity Kayne Anderson Rudnick Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Kayne Anderson Rudnick Investment Management, LLC has been independently verified for the period from January 1, 1999 through December 31, Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Small Cap Core Composite has been examined for the period from January 1, 1999 through December 31, The verification and performance examination reports are available upon request. Kayne Anderson Rudnick Investment Management, LLC, a wholly owned subsidiary of Virtus Investment Partners, Ltd., is a registered investment advisor under the Investment Advisers Act of Registration of an Investment Advisor does not imply any level of skill or training. Kayne Anderson Rudnick Investment Management, LLC manages a variety of equity and fixed-income strategies focusing exclusively on securities the firm defines as high quality. The composite includes all discretionary institutional and pooled Small Cap Core Portfolios. Small Cap Core Portfolios are invested in equity securities with market capitalizations consistent with the Russell 2000 Index, that have market control, rising free cash flow, shareholder-oriented management, strong consistent profit growth, and low-debt balance sheets. For comparison purposes, the composite is measured against the Russell 2000 Index. The Russell 2000 Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total-return basis with dividends reinvested. Benchmark returns are not covered by the report of the independent verifiers. The composite was created in April A list of composite descriptions and policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Prior to January 1, 2011, the composite minimum was $250,000. Prior to December 31, 2010, only non-taxable portfolios are included in the composite. As of January 1, 2011, the composite was redefined to include both taxable and tax-exempt accounts. As of January 1, 2011, the composite was redefined to include both institutional and mutual fund [or pooled] accounts. Previously, only institutional accounts were included. Prior to January 1, 2011, accounts that experienced a significant cash flow, defined as aggregate flows that exceeded 25% of the account s beginning of period market value, were temporarily removed from the composite. The standard management fee schedule currently in effect is as follows: 1.00% for the first $25 million; 0.80% on the next $25 million; 0.70% on the balance. Actual management fees charged may vary depending on applicable fee schedules and portfolio size, among other things. Additional information may be found in Part 2A of Form ADV, which is available on request. The performance information is supplied for reference. Past performance is no guarantee of future results. Results will vary among accounts. The U.S. dollar is the currency used to express performance. Returns are presented net of transaction fees and include the reinvestment of all income. Gross returns will be reduced by investment management fees and other expenses that may be incurred in the management of the account. Model net returns have been calculated by deducting 1/4th of the highest tier of the standard management fee schedule in effect for the respective period from the gross composite returns on a quarterly basis. Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns for accounts in the composite for the entire year. For those years when less than five accounts were included for the full year, no dispersion measure is presented. The three-year annualized ex-post standard deviation measures the variability of the composite (using gross returns) and the benchmark for the 36-month period ended at the following dates: 3-Yr Annualized Standard Deviation (%) December 31 Composite Benchmark Year Total Firm Assets ($ Millions) Total Composite Assets ($ Millions) Accounts at Year End Gross Annual Return (%) Net Annual Return (%) Russell 2000 Index Annual Return (%) Internal Dispersion , , (1.57) , (27.64) (28.40) (33.79) , , , (4.18) , ,841 1, , ,095 1, (4.41) 0.23 The Russell 2000 Index is a trademark/service mark of Frank Russell Company. Russell is a trademark of Frank Russell Company. 9