Fortified Returns

Kayne Anderson Rudnick gets spectacular results from the shares of boring businesses. Their common thread: they’re all little fortresses.

- Antoine Gara

The headquarters for some of the best-performing and fastest-growing stock funds on the planet is a building on Avenue of the Stars in Beverly Hills. Glamour stocks? Far from it. The money managers at Kayne Anderson Rudnick prefer companies selling lawn fertilizer, swimming pool chemicals and the software used by small banks.

Look at the results. The firm’s hottest fund, Virtus KAR Small-Cap Growth, has averaged a 19.4% annual return over the past decade, to 14.7% for the S&P 500. Virtus KAR Small-Cap Core delivered 15.9%. These numbers are after stiff fees, over 2% a year on the no-load C class shares.

Presiding over this success is Douglas Foreman, 61, a Californian who discovered investing in his spare time while serving as a lieutenant on a destroyer. The 17 money managers and research analysts under him focus on small- and midcap companies that rarely garner interest from large brokerages. What they’re looking for are companies with bulwarks against the competition.

Scotts Miracle-Gro gets on the buy list because homeowners see magic in its turf builders. Pool Corp. is a chain of 262 supply centers in the U.S. competing with tiny family-owned outlets that can’t match its Economies of scale.

Jack Henry & Associates has no neural nets to impress you with, just dull software for keeping ledgers. The 9,000 banks and credit unions using it are unlikely to rip out the system and start over with a rival one. KAR has enjoyed a 23% annual return on that company over the past ten years.