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Q4 2020 Small Cap Core Review

Q4 2020 Small Cap Core Review

Performance Review | KayneCast 143

January 26, 2021

It Was the Worst of Times. It Was the Best of Times

No one can claim it was anything but an extraordinary year for the Russell 2000 Index of small cap companies. Q1 was one of the worst markets the index has seen, while Q4 was the all-time best. The volatility and idiosyncrasies of 2020 offered portfolio managers and investors new ideas to explore but we believe, at the same time, proved the value of a consistent long-term approach with a focus on high-quality companies.

How Much Influence Do Events Wield?

Markets will have violent ups and downs as they react to short-term events, which has never been more evident than in 2020. An unimaginable global pandemic. Temporary shut-downs in business sectors. Work-from-home. Vaccine hopes and fears. A presidential election with violent after-shocks. However, history has shown that events like these do not control the markets over the long run, and we think their long-term effects may be over-estimated by investors who keep too close an eye on day-to-day or even quarter-to-quarter movements. At KAR, our goal is to keep out the noise while not ignoring important factors that affect companies’ long-term performance.

That’s why our mandate remains consistent— seeking great businesses that, in the long run, can sustain and grow their competitive advantages that translate into superior financial returns and, ultimately, to higher share prices.

For example, one of the top performers in our Small Cap Core portfolio in Q4 2020 — a provider of electrical and mechanical construction and facility services — experienced a decline in sales and revenue due to the pandemic. However, while other businesses struggled for survival, this one actually grew its operating profit by improving project productivity and overhead expense management. We believe good management and long-standing relationships with a broad, diversified customer base that entrusts mission-critical work to this business enables it to thrive in good times and bad.

Tips for Riding a Roller Coaster

Our Small Cap Core portfolio plays a little in both growth and value fields, but our approach differs from traditional strategies. We look at the sustainability of growth more than its magnitude. And we look for value in industries more than individual companies.

No matter what is going on globally, we aim our research to find high-quality companies with structural competitive advantages that set them up for long-term growth. The market projects forward, but only by months or at best a year or two. In our view, surviving its roller-coaster ride involves the ability to look much further ahead, ignoring the sometimes alarming hills and valleys that lie between you and your destination.

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 the recording of this material and are 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.

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