 |
as of December 31, 2006 |
| Small-Mid Cap Value Portfolio |
| Investment Management Team |
|
|
| Investment Philosophy and
Approach |
- Bottom-up stock selection
- In-depth, 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
|
| Defining Characteristics |
- Seek to achieve returns of the Russell 2500™ Value Index with
S&P 500® Index risk
- Focus on high-quality companies; the “Next Generation
of Blue Chips”
- Manage risk through diversification of sectors and focus on
companies with low business and financial risk
- Structure portfolios for higher quality, superior growth,
and better value
- Maintain average capitalization in line with the Russell 2500™
Value Index
|
| Investment Process |
| Screening |
|
We screen a broad universe of 8,000 companies for the following
criteria:
|
- Strong, consistent growth
- Low-debt balance sheet
|
- High profitability
- Rising free cash flow
|
| 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:
|
- 25 to 35 securities
- Economic sectors +/- 10% of Russell 2500™ Value
Index
|
- Generally, three to four years
|
|
| Top 10 Holdings*† |
|
Arthur J. Gallagher & Co. |
|
Questar |
|
Eaton Vance |
Realty Income |
|
Equitable Resources |
RGA |
|
International Flavors & Fragances |
RPM International
|
|
Owens & Minor |
Valspar
|
|
| Sector Diversification*† |
 |
| Portfolio Characteristics*† |
| |
KAR
Small-Mid
Cap Value |
Russell
2500™
Value Index |
Description§ |
| Quality |
| Return on Equity—Past Five Years |
22.1% |
10.9% |
More Profitable |
| Long-Term Debt/Total Capital |
37.5% |
48.1% |
Less Financial Risk |
| Interest Expense Coverage |
21.3x |
4.0x |
Less Financial Risk |
| Earnings Variance—Past Ten Years |
23.3% |
64.3% |
More Dependable |
| S&P Stock Rating (A+, A, A-) |
70.0% |
21.0% |
Better Quality |
| Growth |
| Earnings Per Share Growth—Past Five
Years |
10.6% |
11.2% |
Higher Earnings Growth |
| Earnings Per Share Growth—Past Ten
Years |
11.1% |
6.0% |
Higher Earnings Growth |
| Dividend Per Share Growth—Past Five
Years |
15.3% |
8.0% |
Higher Income Growth |
| Dividend Per Share Growth—Past Ten
Years |
10.6% |
5.6% |
Higher Income Growth |
| Capital Generation—(ROE x {1-Payout}) |
14.3% |
8.3% |
Faster Business Growth |
| Value |
| P/E Ratio—Trailing 12 Months |
19.7x |
19.6x |
Better Value |
| Dividend Yield |
2.2% |
2.0% |
Higher Income |
| Free Cash Flow Yield |
5.2% |
4.7% |
Better Value |
| Market Characteristics |
|
| $ Weighted Average Market Cap—Four
Qtr. Average |
$3.3 B |
$2.4 B |
Comparable Size |
| Largest Market Cap—Four
Qtr. Average |
$8.0 B |
$8.1 B |
Comparable Size |
| Annualized Standard Deviation—Since
Inception‡ |
14.2% |
15.5% |
Less Market Risk |
|
| Risk-Return Analysis* |
| Inception† - December 31, 2006 |
|
| |
Rate
of
Return (%) |
Standard
Deviation (%) |
Beta |
| Annualized |
|
| KAR Small-Mid Cap Value (Gross) |
12.82 |
14.22 |
0.81 |
| KAR Small-Mid
Cap Value (Net)§ |
11.71 |
14.20 |
0.81 |
| Russell 2500™
Value Index |
14.91 |
15.46 |
1.00 |
| Russell 2500™ Growth Index |
9.08 |
25.23 |
1.20 |
| Russell 2500™
Index |
12.73 |
18.35 |
1.08 |
| Russell 2000® Index |
11.13 |
19.36 |
1.14 |
| S&P 500®
Index |
11.02 |
14.93 |
0.74 |
| Citigroup 3-Month T-Bill |
3.91 |
0.79 |
0.00 |
|
| Historical Returns |
| |
KAR Small-Mid
Cap Value
(Gross) |
KAR Small-Mid
Cap Value
(Net)§ |
Russell
2500™
Value Index |
| Annualized Returns (%)* |
|
| Fourth Quarter |
7.89 |
7.63 |
9.14 |
| One Year |
12.95 |
11.85 |
20.18 |
| Three Years |
12.06 |
10.95 |
16.33 |
| Five Years |
7.49 |
6.42 |
15.51 |
| Seven Years |
9.25 |
8.17 |
15.40 |
| Ten Years |
11.28 |
10.18 |
13.70 |
| Inception† |
12.82 |
11.71 |
14.91 |
| Annual Returns (%) |
| 2006 |
12.95 |
11.85 |
20.18 |
| 2005 |
4.42 |
3.37 |
7.74 |
| 2004 |
19.33 |
18.13 |
21.58 |
| 2003 |
16.58 |
15.44 |
44.93 |
| 2002 |
-12.53 |
-13.43 |
-9.88 |
| 2001 |
4.86 |
3.83 |
9.74 |
| 2000 |
23.47 |
22.26 |
20.79 |
| 1999 |
7.02 |
5.98 |
1.49 |
| 1998 |
20.98 |
19.79 |
-1.92 |
| 1997 |
21.00 |
19.81 |
33.09 |
| 1996 |
26.98 |
25.72 |
22.21 |
| 1995 |
18.57 |
17.40 |
29.76 |
| 1994 |
2.75 |
1.74 |
-1.31 |
| 1993 |
20.00 |
18.84 |
19.30 |
|
| 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, fully discretionary Small-Mid Cap Value Wrap Portfolios (including cash) under management for at least one full quarter. The minimum account size for this composite is $100,000. For comparison purposes, the composite is measured against the Russell 2500™ Value Index. The Russell 2500® Value Index is a market capitalization-weighted index of value-oriented stocks of the 2,500 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. The composite was created in October 2001. There was a change in personnel in January 1998. No alteration of the composite as presented here has occurred because of this change.
For periods prior to October 1, 2001, the Small-Mid Cap Value Wrap composite calculations have been linked to the firm’s Small Mid Cap Wrap composite performance, which represents all fully discretionary Small Mid Cap Wrap Portfolios (including cash) under management for at least one full quarter. For periods prior to July 1, 2000, the Small-Mid Cap Wrap composite calculations have been linked to the firm’s Small Cap Wrap composite performance. For periods prior to October 1, 1995, the Small Cap Wrap composite calculations have been linked to the firm’s Small Cap actual historical non-wrap fee composite performance. Beginning on October 1, 1995, only eligible wrap fee portfolios are included in composite results.
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. Performance results 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 wrap 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 $384,656. For periods prior to October 1, 1995, composite calculations are presented both before and after the deduction of an assumed maximum annual wrap fee of 1%. The historical non-wrap fee composite gross annual performance, as presented, is after commissions on portfolio transactions, which under a wrap fee agreement are included in such wrap fees.
|
| |
Total Firm
Assets
($ Millions) |
Total
Composite
Assets
($ Millions) |
Accounts
at
Year-End |
Percentage
of Non-
Fee-Paying
Accounts |
Gross
Annual
Return (%) |
Net
Annual
Return (%) |
Russell 2500™
Value Index
Annual
Return (%) |
Annual
Standard
Deviation (%) |
| 1996 |
2,107 |
2 |
Less than 5 |
0 |
26.98 |
25.72 |
22.21 |
0.00 |
| 1997 |
2,855 |
6 |
17 |
0 |
21.00 |
19.81 |
33.09 |
1.29 |
| 1998 |
4,160 |
14 |
36 |
0 |
20.98 |
19.79 |
-1.92 |
2.45 |
| 1999 |
5,381 |
57 |
168 |
0 |
7.02 |
5.98 |
1.49 |
1.77 |
| 2000 |
6,686 |
106 |
269 |
0 |
23.47 |
22.26 |
20.79 |
2.01 |
| 2001 |
8,384 |
98 |
301 |
0 |
4.86 |
3.83 |
9.74 |
0.06 |
| 2002 |
8,612 |
469 |
2,850 |
0 |
-12.53 |
-13.43 |
-9.88 |
0.79 |
| 2003 |
10,262 |
545 |
3,005 |
0 |
16.58 |
15.44 |
44.93 |
0.46 |
| 2004 |
10,320 |
601 |
3,008 |
0 |
19.33 |
18.13 |
21.58 |
0.37 |
| 2005 |
8,533 |
530 |
2,879 |
0 |
4.42 |
3.37 |
7.74 |
0.26 |
|
If applicable, the annual standard deviation presented is an asset-weighted calculation of performance dispersion for accounts in the composite for the entire year.
The Russell 2500™ Value Index is a trademark/service mark of Frank Russell Company. Russell® is a trademark of Frank Russell Company. |
|
