Large Cap Core Portfolio - Kayne Anderson Rudnick - Quality at a Reasonable Price™


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Equity | Fixed Income | Balanced

Friday, November 21, 2008

	as of September 30, 2008
Large Cap Core Portfolio

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Management Team Investment Philosophy Investment Objectives and Core Beliefs Investment Process	Top 10 Holdings Sector Diversification Portfolio Characteristics Historical Returns	P/E by Stock Ranking Disclosure Download PDF

Investment Management Team

	Years of Research Experience
Richard Sherry, CFA	9

Investment Philosophy and Approach
Bottom-up stock selection Independent fundamental research High-quality companies with sustainable competitive advantages Disciplined valuation approach applying multiple valuation measures Long-term vision, resulting in low portfolio turnover
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Investment Objectives and Core Beliefs
Grow investor capital at attractive rates Protect investor capital in difficult markets Focus on high qualilty Manage risk through diversification of sectors and focus on companies with low business and financial risk
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Investment Process

Screening
We screen a broad universe of 12,000 companies for the following criteria:
Low-debt balance sheet Superior credit metrics Low volatility of earnings		High return on invested capital Rising free cash flow Strong profit margins
Fundamental Research
Fundamental research process:		Develop independent conviction in:
Qualitative industry and business assessment Financial analysis Valuation modeling		Sustainability of competitive advantages Management’s commitment to shareholders Superior return opportunity
Construction & Management
Diversification guidelines:		Holding period:
20 to 30 securities Economic sectors +/- 10% of S&P 500® Index		Generally, three to four years

Top 10 Holdings*

Avon Products		Microsoft
C.R. Bard		PepsiCo
Costco Wholesale		Procter & Gamble
Johnson & Johnson		Walt Disney
MetLife		Wells Fargo

Sector Diversification*

* Data is obtained from FactSet Research Systems and is assumed to be reliable. A complete listing of portfolio holdings and specific security transactions for the preceding 12 months is available upon request. Holdings are subject to change.
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Portfolio Characteristics*

	KAR Large Cap Core	S&P 500® Index	Description§
Quality
Return on Equity—Past Five Years	22.8%	21.3%	More Profitable
Total Debt/EBITDA	1.0x	1.8x	Less Financial Risk
Interest Expense Coverage	13.5x	8.1x	Less Financial Risk
Earnings Variance—Past Ten Years	26.0%	46.4%	More Dependable
S&P Credit Rating (AAA, AA, A)	91.2%	66.0%	Better Quality
Growth
Earnings Per Share Growth—Past Ten Years	12.4%	11.1%	Higher Earnings Growth
Dividend Per Share Growth—Past Ten Years	12.5%	10.3%	Higher Income Growth
Capital Generation—(ROE x {1-Payout})	16.1%	14.7%	Faster Business Growth
Value
P/E Ratio—Trailing 12 Months	14.9x	14.8x	Better Value
Dividend Yield	1.9%	2.4%	Comparable Income
Free Cash Flow Yield‡	6.3%	5.5%	Better Value
Market Characteristics
$ Weighted Average Market Cap	$91.0 B	$87.3 B	Large Capitalization

Historical Returns*
Periods Ending September 30, 2008

* All periods less than one year are total returns and are not annualized. Returns are preliminary † October 1, 2007 ‡Data is obtained from FactSet Research Systems and is assumed to be reliable. §Net of all fees and expenses. Assumes a 1% annual fee.
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Quality is Cheap P/E by Stock Ranking‡
As of September 30, 2008

Source: Standard & Poor’s Quality Trends. Note: High quality is defined as all stocks with an S&P stock ranking of A+, A, and A-. Low quality is defined as all stocks with an S&P stock ranking of B+ and below. Past performance is no guarantee of future results.
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Disclosure

Kayne Anderson Rudnick Investment Management, LLC has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).

Kayne Anderson Rudnick Investment Management, LLC, a wholly owned subsidiary of Phoenix Investment Partners, Ltd., is a registered investment adviser under the Investment Advisors Act of 1940. 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. Additional information regarding the firm’s policies and procedures for calculating and reporting performance is available upon request. The firm maintains a complete list and description of composites, which is available upon request.

The composite is defined as all non-taxable, non-wrap fee, fully discretionary Large Cap Core Portfolios (including cash). The minimum account size for this composite is $250,000. For comparison purposes, the composite is measured against the S&P 500® Index. The S&P 500® Index is a market capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total-return basis with dividends reinvested. The composite was created in October 2007.

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 gross of management fees and net of transaction fees and include the reinvestment of all income. Trade date accounting is used. Performance has been calculated by geometrically linking monthly returns with accounts entering and exiting the composite quarterly.

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 $500,000 portfolio had an annual return of 10%, it would grow to $805,255. The net compounded effect of a 1% annual investment management fee would total $35,943 and result in a portfolio value of $769,312. A fee schedule is available upon request and is described in Part II of the firm’s ADV.

Year	Total Firm Assets ($ Millions)	Total Composite Assets ($ Millions)	Accounts at Year-End	Percentage of Non- Fee-Paying Accounts	Gross Annual Return (%)	Net Annual Return (%)	S&P 500® Index Annual Return%	Annual Standard Deviation (%)
2007*	5,392	3	< 5	0	-0.12	-0.37	-3.33	NA

*Performance calculations are for the three months ended December 31, 2007.

If applicable, the annual standard deviation presented is an asset-weighted calculation of performance dispersion for accounts in the composite for the entire year.