LOS ANGELES -- Catering to the institutional investor was not what John Anderson and Richard Kayne had in mind when they started their firm in 1984. Rather, the two Los Angeles entrepreneurs wanted to buy more companies and needed a structure in which to manage the portfolios of alternative investments they created.
Today, Kayne Anderson Rudnick Investment Management LLC has more than $6.5 billion under management in traditional investments, 25% of which is from institutional investors. Of the rest, 50% is from wrap-fee programs and 25% is managed for high-net worth individuals.
Part of the company's success in the institutional market is due to Kevin Welsh, director of marketing, who interviewed at the company in the summer of 1999 and said he was "blown away. I expected to come in and spend a polite hour and never expected to find that it was ripe for the institutional market." Mr. Welsh said he came into the office and "like a consultant, ran analytics on the equity strategies, and I was amazed at the risk-return characteristics, the performance, the process, everything."
The "great product" that Mr. Welsh found was a "quality at a reasonable price" strategy that Allan Rudnick, the chief investment officer, devised when he joined Kayne Anderson in 1989. Mr. Rudnick started a traditional investment management division, that was run in addition to Mr. Anderson and Mr. Kayne's private capital division, Kayne Anderson Capital Advisors, which manages in excess of $500 million. Mr. Rudnick's name recently was added to the company's name to reflect his contribution to the investment management division's success, said Mr. Kayne.
The QARP equity strategy is available across the whole capitalization range, can be screened for socially responsible investors, and comes in international, global and domestic versions. The strategy is available in separate account and mutual fund formats, and the international QARP strategy soon will be available in a commingled fund. A small-cap commingled vehicle will be available shortly afterward, said Mr. Welsh.
Calling on contacts
Mr. Welsh accepted Kayne Anderson Rudnick's job offer to be its first institutional marketer and immediately began to call on consultants and clients he knew from his previous position as an institutional marketer in Merrill Lynch & Co.'s Los Angeles office. Wilshire Associates Inc., Santa Monica, Calif., already had been in touch with the investment management team about the international and small-cap strategies and in just a year, Mr. Welsh has managed to get the company onto the "recommended" lists of at least 10 of the country's major investment management consultants.
That status has resulted in new institutional business of $250 million year-to-date, and Mr. Welsh said he expects to end the year with new institutional business close to $400 million. Some of the new institutional clients brought in over the last 12 months were Church of the Nazarene for socially screened international mandates and the Metropolitan Utility District of Omaha for small-cap equities, Mr. Welsh said.
Mr. Welsh said he envisions the firm becoming "a $20 to $30 billion firm," and his aim over the next few years is to bring the client split to 50% institutional. He might just be on target with his estimates of the company's growth potential. Assets under management doubled in the last three years, with $2 billion brought in so far in 2000 alone. Assets for the QARP international strategy jumped to more than $1.2 billion year-to-date. And the small-cap strategy jumped up to $1.3 billion from $650 million a year ago.
Why the interest in the international and small-cap strategies? Performance has been benchmark-busting most of the past five years.
The International Equity strategy, managed by Jean-Baptiste Nadal, returned an annualized 18% for the five years ended Sept. 30, 14.3% for the three years, and 9% for the one year, handily beating the returns of its benchmark, the MSCI EAFE index, which were 8.6%, 7.4% and 3.2% respectively.
The Small-cap Equity Strategy, managed by Robert A. Schwarzkopf, returned an annualized 17.1% for the five years ended Sept. 30, 11.1% for the three years and 13.5% for the one year to beat its index, the Russell 2000 index, in two of the three periods. The Russell 2000 returned an annualized 12.4% for the five years, 5.96% for the three years and 23.4% for the one-year period.