on a company ’ s price-to-book ratio , and a high price-to-book usually equates with higher growth . He says that because his fund invests in high-quality businesses that are less capital intensive , the “ book ” in its price-to-book ratio is lower , and the higher resulting ratio lands the portfolio in the growth category despite its otherwise “ core-ish ” characteristics . Christensen defines “ core ” as the middle ground between value and growth .
The Quality Factor
The “ KAR ” in the fund ’ s name stands for Kayne Anderson Rudnick , a Los Angeles-based asset management and wealth management firm that ’ s among the nation ’ s largest RIAs . Its parent company is Virtus Investment Partners , a publicly traded holding company of boutique investment managers .
“[ The wealth advisory business ] is right down the hall from me ,” says Christensen , who ’ s on the asset management side . “ We are part of the same firm , and we have a relationship with them , but in general we try to keep things separate .”
Kayne Anderson Rudnick investment management ’ s philosophy focuses on three basic tenets — high-quality businesses , a lower-volatility approach and a high-conviction portfolio . “ Quality is a business characteristic ,” Christensen says . “ We want to find companies that can grow , protect and nurture a market over long and multiple economic cycles . The ability of companies to hold up well in down markets and lower that downside capture will let us enhance compounded returns .”
With those traits in mind , he and Stone look for business models with wide defensible moats . “ It could be a strong brand , a network effect , high switching costs or scale advantage ,” he says .
Other attributes of quality include business models with less capital requirements , solid balance sheets and strong cash flow . “ They shouldn ’ t need the debt or equity markets to grow their business , so our companies typically have less debt on their balance sheet ,” he says .
He adds that good management is part of the quality equation — which means managers should demonstrate a good deal of inside ownership , boast a track record of being good capital allocators , and make sure their compensation is aligned with that of the company ’ s shareholders . “ Management is key because they can take a good business and make it great ,” he says , whereas questionable management “ can run it into the ground .”
All this ties into Christensen and Stone ’ s emphasis on finding lowvolatility companies with lower earnings variability , consistent growth and high returns on capital , along with the ample free cash flow and less need for external financing . “ If you retain profitability during difficult times , your stock price should remain buoyant as well ,” Christensen says .
This is reflected in the fund ’ s risk /
Manager Jon Christensen Age 59
Professional Background He is a portfolio manager and senior research analyst at Kayne Anderson Rudnick Investment Management . He has primary research responsibilities for the small- and mid-cap healthcare and industrials sectors . Before joining Kayne Anderson Rudnick in 2001 he was a portfolio manager and senior research analyst for Doheny Asset Management . He entered the investment industry in 1995 and is a chartered financial analyst .
Outside Interests Family time , golf , travel and connecting with nature . He is a Rams season ticket holder and avid baseball card collector with roughly 20,000 cards . reward profile . According to Morningstar , the Virtus KAR Mid-Cap Core Fund offers below-average risk and highreturn potential for its category . Its upside capture ratio comfortably exceeds the category average , while its downside capture ratio is significantly lower than the category average .
Concentrated Portfolio
Because these are high-conviction names , the fund is concentrated and generally invests in only 25 to 35 stocks . The portfolio has a low turnover rate of about 20 %, and the fund ’ s active share of nearly 90 means it has little correlation with its benchmark . ( An active share score of 100 indicates that a fund ’ s equity portion and its benchmark have no common holdings .) “ We hold fewer positions and have higher weight in those positions , so that ’ s why we have a high active share versus the benchmark ,” Christensen says .
“ We ’ re hired to be an active manager ,” he adds . “ We want to pick from the index , but we don ’ t want to be the index . Given our emphasis on quality , there may be certain sectors or areas of the market where we won ’ t invest .”
For example , the fund typically doesn ’ t own a lot of energy names because that ’ s a capital-intensive industry , one that ’ s highly levered and tied to volatile commodities . And the managers don ’ t invest in a lot of biotechs because many of those companies don ’ t have earnings .
“ So certain sectors might be completely empty and we ’ ll be overweight other sectors as a result ,” Christensen says . “ We used to have more restrictions on our overweights and underweights , but
Portfolio Statistics
Number Of Stocks 29 Weighted Avg . Mkt . Cap
$ 19.27 billion P / E Ratio 27.4x Std . Dev Fund / Benchmark 18.71 / 19.02 Turnover Ratio 20 % Net Expense Ratio 0.95 %
Portfolio stats as of 6 / 30 / 23 . Expense ratio figures are for the institutional share class . Sources : Virtus Investment Partners and Morningstar .
PHOTOGRAPHY OF PORTFOLIO MANAGER COURTESY OF VIRTUS INVESTMENT PARTNERS NOVEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 43