Stephen A. Rigali is the Executive Managing Director of Kayne Anderson Rudnick (KAR), a Los Angeles, California-based investment management and wealth management firm.
Russ Alan Prince: What company characteristics define KAR's "high quality" investment strategy?
Stephen A. Rigali: KAR defines a “high quality” business as one that possesses a durable competitive advantage and can consequently generate high, enduring profitability. Typically, we look for quantitative financial indicators associated with competitive advantages, including a high return on capital, a history of resilient earning power, or ample free cash flow generation. However, the presence of a competitive advantage can be masked by accounting peculiarities, unrelated business segments, unusual corporate actions, temporarily high business expenses, industry cyclicality, business immaturity, and so on. Therefore, we also seek to identify other non-financial statement indicators of competitive advantages such as persistent gains in market share, pricing power, or a low operating cost position.
From our perspective, these financial metrics are simply an output and not necessarily an indicator of a quality business. We believe it is also important to focus on more qualitative metrics: what is differentiated about a business that allows it to generate results sustainably and dependably over time? What is unique about this business model that safeguards it against competition over time?
In summary, we are seeking to understand and develop conviction in the qualitative characteristics of the business in determining whether it meets our “high quality” definition and not simply rely on a business’s financial characteristics to develop that judgment.
Prince: KAR has a unique approach to its leadership team, boasting three executives without a singular CEO. Can you explain the benefits of this structure and why it has been successful?
Rigali: There are three of us on the Executive Managing team: Doug Foreman is the CIO, Jeannine Vanian is the COO, and I’m the firm’s Executive Managing Director. Our executive structure and approach are unique; the three of us share responsibility for strategy and day-to-day management of the firm.
There must be collaboration and respect for a team to work effectively: Jeannine has been here for 33 years, I have been here for 31 years, and Doug has been here for 11, so we have been together for a long time. We complement one another in that each of us specializes in our own daily functional areas of focus. Doug manages the firm’s 19-person investment team responsible for our equity strategies; Jeannine is responsible for all operational aspects of our business; I have broad oversight of our global distribution activities, including our wealth management business. Although we have individual responsibilities, we make strategic decisions for the firm collaboratively.
There is strength in bridging three people from different functional areas with differing ideas on various topics and reaching a consensus based on our collective input. I think that provides a broader range of thought versus tasking one individual with dictating direction, but it only works when people come from a collaborative environment and respect one another’s opinions. We are the second-generation executives at KAR, and there is a company culture of collaboration that we try to uphold—I think there are a lot of strengths to that versus a singular CEO.
Prince: KAR has both a wealth management and investment management division in-house. What are the perks of this and how does your team work alongside the wealth advisors?
Rigali: As you have noted, KAR has two divisions at the firm: our Investment Management and Wealth Management divisions. This is a unique business model in the wealth management industry and appeals to our clients. The clients that are attracted to our wealth management business are those who are interested in receiving both wealth management services, such as financial and estate planning services, which we provide in a customized service model, along with institutional investment management services. Our firm can offer both.
Furthermore, our clients are interested in having access to the portfolio managers and research analysts who are responsible for the management of their investment portfolios. The firm’s portfolio managers are available to the firm’s wealth advisors to assist in the ongoing management of our client relationships which makes for a unique and customized client experience.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
Disclosure
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of publication of this material and is subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.
