On December 8, 2020, Virtus Investment Partners, in partnership with Kayne Anderson Rudnick (KAR) Investment Management, launched Virtus KAR Small-Mid Growth Fund. The fund applies Kayne Anderson’s firmwide discipline to small and mid-cap stocks. The hallmarks of that discipline are

• A focus on quality: the firm advertises that “For more than 30 years, we have focused on investing in quality businesses. Small caps, mid-caps and large caps. Core, value and growth. All market environments. For KAR, quality is not a fad. It is our heritage and the standard to which we hold ourselves.”
• A focus on valuation: they target stocks that are undervalued relative to their future growth potential, though those are still very richly valued by conventional measures.
• A focus on focus: all of the strategies hold 25-50 names.
• A focus on risk: they target “the highest quality companies with competitive advantages and with little individual business risk … and little to no debt … purchased at attractive prices” which, by their nature, are less volatile than their peers.

So 25-50 domestic stocks with capitalizations in the $1 billion – 35 billion range and an anticipated holding period of around three or four years with an understandable preference for longer holds. The fund will “primarily” own US stocks but the fund’s siblings discussed below, also hold 10-20% non-US stocks.

Virtus KAR Small-Mid Growth is managed by Julie Biel. Ms. Biel has been a KAR analyst since 2013, with a focus on small- to mid-cap tech stocks.  A December 2020 article in Forbes identified her as one of the “Wonder Women” of investing (along with folks like Cathie Wood of ARK, Nancy Zevenbergen and Sarah Ketterer of Causeway) based on their 2020 performance. Before joining KAR in 2013, Ms. Biel worked as an equity research analyst at Imperial Capital (a multi-national investment bank) and at Merrill Lynch. In all, she’s been in the industry since 2004. She earned an MBA (2009) from UCLA and is a Chartered Financial Analyst charter holder, one of the most challenging professional certifications in the industry to achieve. She’s also a competitive show rider.

Reasons to consider the fund

The strategy seems to work with small caps. Virtus KAR Small Cap Growth is a five-star fund that’s also earned a Bronze analyst rating from Morningstar and MFO’s Great Owl designation for consistently top-tier risk-adjusted returns. Morningstar analyst Adam Sabban highlights “a talented management duo … a rigorous focus on high-quality companies … durable portfolio … holdings [that] tend to sport materially lower volatility in earnings and revenue than the broader market …stellar results.” The fund has an exceptionally high active share (98) and low turnover (17%).

The strategy seems to work with mid-caps. Virtus KAR Mid Cap Growth is a five-star fund that’s earned a Gold analyst rating from Morningstar. The fund has a long and winding history, starting in 1994 as National Worldwide Opportunities Fund, becoming a Phoenix fund under three separate monikers (World Opportunities, Equity, Phoenix Aberdeen Worldwide) before being adopted by KAR in February 2012. In the nine years since CIO Douglas Foreman became manager, the fund finished as one of the top 10 mid-growth funds for total return and one of the top five in Sharpe ratio. The fund has a high active share (84) and exceptionally low turnover (14%).

The strategy seems to work with separately managed accounts. Ms. Biel has managed the KAR Small-Mid Sustainable Growth Strategy in separately managed accounts since 2018. (The “sustainable” in the name refers to the sustainability of a firm’s business model, not particularly an environmental sensitivity. It’s likely that the fear of confusing investors is what kept the word from being used in the fund’s name.) She’s responsible for about $35 million in 50 separately managed accounts, which does seem like a useful testing ground. Since its inception, the strategy returned 31.1% annually against 20% for its benchmark index. It also seems to embody less turnover and lower volatility than its peers. Ms. Biel also has a substantial personal investment ($100,000 – 500,000) in the strategy.

Bottom line

Over most trailing periods – whether it’s 5 years, 20 years or 50 years – the returns from the small-growth group are modestly ahead of the large-growth group’s, though with substantially higher volatility. Therein lies the key to considering such funds: if your manager isn’t keenly attuned to managing the risk of high-profile crashes, it’s not worth considering. The evidence at hand suggests that KAR is pretty thoughtful about those risks and they trust Ms. Biel to manage them. It’s worth investigating, especially for investors not looking for pure (read: hi vol) small-cap exposure.

Administrative details

The fund’s “A” shares carry a 5.5% load that’s universally ignored at online brokerages and an expense ratio 0f 1.30%. The minimum initial investment is $2500, reduced to $100 for tax-advantaged accounts and those with an automatic investment plan. It’s likely to take a little while before the fund is on the standard brokerage platforms as its siblings already are. The fund’s Virtus webpage probably should be read in conjunction with the strategy’s factsheet at Kayne Anderson since the latter reveal both more detail and a slightly longer record.