For the third straight quarter, Kayne Anderson Rudnick Investment Management LLC's Small-Cap Quality Select strategy occupied the No. 1 spot for the year ended March 31 — and again, by a wide margin — with a gross return of 76.31%. The manager also took the fourth overall spot with its Small-Cap Sustainable Growth strategy returning a gross 42.15% for the year.
Todd Beiley, portfolio manager and senior research analyst at Kayne Anderson Rudnick, said the aim of the strategies is "really just to find businesses that we can identify (that) have very long-lasting competitive protections.''
Both strategies are concentrated, as Mr. Beiley said they try not to overdiversify. He said the sustainable growth strategy tends to have about 30 stocks and the select strategy "is a really more focused version, so that's generally around 10 stocks or so."
"There's overlap in holdings between those two strategies for sure," Mr. Beiley said, "so our results are driven very much by specific holdings, rather than by schematic sectors."
The primary holdings responsible for both strategies' performance are Autohome Inc., a Chinese internet company that offers automotive-related content, and Interactive Brokers Group Inc.
"(Autohome) had been going into a business segment of direct sales, which had put their profitability under pressure," Mr. Beiley said. "New management has since reversed course on that strategy so the profitability of the business has vastly improved over the past year.
"Interactive Brokers, in our view, have a very sound structural advantage as a low-cost operator and they just have persistently gained market share for years and they continue to do so," said Mr. Beiley. "More recently their business has benefited as volatility has come back into the market, (meaning) trading activity has increased, and as short term interest rates have crept up their net interest in income has grown."
Zevenbergen Capital Investments LLC's Z/Tech strategy, a concentrated growth portfolio that looks for companies that are disrupting industries, ranked second on the one-year list, with a gross return of 51.74% for the year ended March 31.
The strategy, which as of April 1 was renamed the Genea strategy, also led the top 10 for the five years ended March 31, with an annualized gross return of 27.53%. It was the third straight quarter the strategy led the five-year list.
Morningstar's Mr. Thomas said much of the success of this manager's strategy has been a significant consumer cyclical stake in technology. He noted that Nancy Zevenbergen, founder, president and chief investment officer of the Seattle-based firm, was an early investor in Starbucks Corp., Microsoft Corp. and other technology companies coming out of the Northwest.
Brooke de Boutray, managing director, portfolio manager at Zevenbergen, said the strategy is a bottom-up, very high-growth, highly concentrated strategy that has about 25 holdings and invests in "disruptive companies that have a very long-term vision that can drive growth for the next decade."
The strategy invests in "high-conviction, founder-led companies that are rather entrepreneurial, I would say, despite their size."
While many of their most recognizable holdings are large-cap companies, "we're just looking for the best growth across all market caps," Ms. de Boutray said. She noted that a lot of high-growth companies in the strategy, such as Amazon.com Inc., Netflix Inc. and Tesla Inc. have grown to become large cap.
Netflix and Amazon have benefited significantly from the growth of e-commerce, Ms. De Boutray said.
"Commerce shopping is really changing. It's going online, there's a lot of disruption in the industry, there's a lot of friction being reduced in the industry, how they're shipped, how we access that," she said.