Kennedy Capital continues to adapt to big changes

ST. LOUIS — Kennedy Capital Management Inc. lost two presidents in less than six months and weathered those storms with no client departures. Now company officials are preparing for another issue: working toward employee ownership at the $3.8 billion firm.

The 25-year-old asset manager is seeking to reduce the Kennedy family's share. Employees currently have a 40% stake, up from about 17% in 1999.

Helping to drive the employee-ownership plan was Paul Miller, president and chairman of the board, who succumbed to cancer in July. Three months before, Gary Campbell, president and chairman of the board, had resigned for personal reasons.

The firm is being run by Patricia Row, chief operating officer and director of research, and Richard Sinise, chief investment officer and chief portfolio manager. Ms. Row has been with the firm since 1983. Mr. Sinise co-founded the firm with Gerald Kennedy in 1980. Both executives sit on the board and are jointly responsible for implementing Mr. Miller's "big-picture, strategic" initiatives, including succession and employee-ownership planning, said Chuck Bryant, vice president of marketing. Richard Todaro, small-cap growth portfolio manager and board member, is also involved boosting employees' ownership stake.

"The firm is running smoothly," Mr. Bryant said. "Eventually there will be a president, but in the near term, we don't feel any need to force the issue. We're comfortable with the management structure as it is right now."

Kennedy's immediate plans center on beefing up client-service capabilities and building up its three-year-old midcap value strategy, he said. Kennedy recently hired Randy Kirkland, a former senior consultant at Asset Consulting Group, Inc., St. Louis, as director of client servicing to jump-start the effort.

The firm is also in the early stages of majority employee ownership discussions with the Kennedy family, although there is no deal on the table.

The majority of voting stock rests in a trust created by founder Gerald Kennedy, who died in March 1999. His daughter, Mary Kennedy, is a member of the board.

Thomas White, senior analyst at consulting firm Stifel, Nicolaus & Co., Inc., St. Louis, said Terry Raterman, Kennedy's Small Cap Select fund portfolio manager, told him when "any changes in ownership would be transitioned on a seamless basis." One of Stifel's high-net-worth clients, which Mr. White would not identify, is invested in a Kennedy portfolio.

Despite the management turnover, the company's fundamentals remain strong. Assets under management have jumped 137% in a little less than three years, reaching $3.8 billion as of June 30, up from $1.6 billion at the end of 2002.

New accounts total $330 million as of July 31, said Mr. Bryant, who declined to divulge new client names. He said the new assets are primarily small-cap institutional accounts in Kennedy's pipeline from last year, combined with $150 million brought into the Small Cap Value II portfolio.

Kennedy will not continue soliciting new clients for its four institutional small-cap strategies, which are at full capacity.

However, the Small Cap Select, a separate account strategy aimed at high-net-worth clients, remains open to new investors. It has taken in $11 million in assets for the six months ended June 30, reaching $75.6 million.

The firm's midcap value strategy, which was three years old in January, is generating institutional interest, Mr. Bryant said. It has about $4 million in assets, mostly from high-net-worth individuals. Kennedy has verbal commitments from two new institutional clients; one of the allocations will be about $1.5 million, and the other will be "significantly larger," Mr. Bryant said in an e-mail.

Existing clients aren't worried about Kennedy from an organizational standpoint.

Lawrence McCulloch, executive director of the $640 million Oklahoma Law Enforcement Retirement System, Oklahoma City, said he has talked with the company and doesn't anticipate making any changes to the $60 million active domestic small-cap value equity portfolio Kennedy runs for the fund.

The $4.8 billion Municipal Employees' Retirement System of Michigan, Lansing, automatically put Kennedy on watch for a $390 million active domestic small-cap value portfolio after Mr. Campbell's departure in the spring, said Jeb Burns, chief investment officer. As part of board procedure, the firm will be on watch for four quarters, but "we're not really concerned," he said.

"For us, the important thing is the investment process," Mr. Burns said. "We like the portfolio managers. They drive the investment decisions, rather than the company."