Craig Thrasher

Craig Thrasher, CFA
Portfolio Manager and Senior Research Analyst
Kayne Anderson Rudnick

KAR portfolio manager Craig Thrasher discusses the opportunity global small-cap stocks offer investors and takes a close look at KAR’s Global Small Cap strategy.

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STEVE RIGALI: Welcome to the Kayne Anderson Rudnick KayneCast podcast. I'm Steve Rigali and I'll be your host today. With me today is Craig Thrasher, co-portfolio manager on the Kayne Anderson Rudnick Global Small Cap portfolio. Welcome, Craig.


00:40: Early Influences in Investing

STEVE: So, Craig, I thought a good place to start today for our listeners is to learn a little bit about your background. So why don't you talk to us about what initially got you interested in investing and why do you like investing in small-cap stocks in particular? 

CRAIG: Sure. What interested me initially—I feel pretty fortunate—I was exposed to investing through a class in undergrad actually. I had a really good professor. It was an investments class, and it was just one of those things. I think a lot of young people going through college or even after college still trying to figure out what it is that they want to do for a career, and this was something that just immediately captivated me. And it helped that I had a really good teacher. There's a lot of interesting things that I thought about investing that were I thought compatible with who I was personally. And so, there's a lot that was interesting about it.

I think the thing that stood out to me about this particular professor that I had that really got my attention was just the difference between, say, a good company and a good investment. And he was a bit of a contrarian by nature, and I think that's something that's always been a comfortable position for me to be outside of the herd. And so, bringing that contrarian mindset from an investing perspective was something that was interesting and being willing to do something different than the herd. 

And in fact, if you are going along with the herd in investing, you're probably not going to do very well. So, I don't know, that was something that was interesting to me early on. And we had different books that we read in the class, some Peter Lynch books, and that was just a start for me to just learn and I just started reading everything I could about investing and eventually here I am. 

02:45: Taking an Interest in Small-Cap Stocks

STEVE: So how did you end up focusing on small-cap stocks?

CRAIG: Well, I think as an investor, you're always trying to find, like I said, some kind of part of the market that's not being fully appreciated. So, looking in places where others aren't. Certainly, I think in the small-cap space, international, outside of the U.S. is even less developed than small caps in the U.S. So, I think we're always as investors trying to uncover those hidden gems and certainly have a better chance of doing that within the small-cap space compared to large-cap companies like Apple – you’ve got 50 sell-side analysts covering, it's a two trillion plus market cap company. I mean, how much value are you adding on the margin there? So, I think it's a little bit more exciting to find these companies earlier on.

STEVE: What are typically the size of the companies that you're looking at? 

CRAIG: Well, I would say in general, we like to find companies in that sub $5 billion market cap U.S. as an initial investment but the market-cap range or the benchmark, I think bounces around but say anything below $10 billion, we feel like would be fair game. But like I said, I think our ideal initial investment is a sub $5 billion market cap company and then hopefully that will grow over time.

STEVE: So, can you tell us a little bit about what type of companies interest you and how do you find these companies? 

CRAIG: Yes. So, we're looking for companies that have something unique about them. I think in the small-cap space in particular you have a very wide range in terms of the quality of companies that you can find. There are some companies that are going to be around and thriving 5, 10 years from now, but some of these companies might not be around 5, 10 years from now. So, we're trying to find a select group of what we think are very strong franchises around the world. We're looking in the U.S., we're looking outside of the U.S., we're looking in developed markets, emerging markets, wherever we can find companies that we think have something special, something unique, a competitive advantage—moat is kind of the cliche that everybody talks about—but we're looking for businesses that have something unique about them that in a competitive world will allow them to thrive financially for many years into the future.

STEVE: And so, when you find a company that interests you, do you speak to the management team from these companies, and what access do you have to that management team? 

CRAIG: Yeah, I think, again, going back to the small cap versus large cap, this is a differentiator within the small-cap space. We tend to speak to the CEOs of the companies, CEOs, CFO, and a lot of times, particularly on the international side, we're speaking to the founders of the company. So, this is something that again, if you're talking to the IR person at Apple or Amazon, I'm not sure what kind of unique insights you're going to get about a business.

But, as an example, one of the companies that we bought in the Global Small-Cap portfolio last year is a company called FDM Group, founded over 30 years ago by Rod Flavell. We've had many conversations. And when you have conversations with somebody who's been the founder of a business and running the business for 30 years, I think the nature of those types of conversations are much different than what you get, like I said, with your typical IR from a large-cap company. 

06:15: Constructing the KAR Global Small Cap Portfolio

STEVE: So, Craig, how do you think about constructing your portfolio? Typically, how many names are in the portfolio? How does it get diversified by industry and by geography? 

CRAIG: So, we own 40 to 50 companies at any given time. And our goal is really to just have our investments be driven by our bottom-up analysis wherever we're seeing the best opportunities around the world, wherever that is—in the U.S., outside of the U.S., developed, emerging markets. And we do have some constraints from a geographic diversification perspective. We want to have at least 35% of the portfolio either in the U.S. or ex-U.S. at any given time. As I mentioned, we do have some emerging markets exposure, which is about 14% of the portfolio right now. It's ranged between say 10% and 20% over time. But like I said, our biggest focus is really just to try to get our clients invested in the best companies around the world where we can find those attractive valuations. 

07:15: Searching for Non-U.S. Holdings and The Role of the Macro Environment

STEVE: Do you find the same type of quality companies outside the U.S.?

CRAIG: I do think there's definitely no monopoly on great businesses here in the U.S. We feel like we’ve found some truly exceptional businesses both within the U.S. and outside of the U.S. I think the biggest difference right now that we're seeing is companies in the U.S. tend to be more expensive. High quality businesses across the spectrum we think are more expensive right now in the U.S. than they are outside of the U.S. But we don't think that we have to take a step down in terms of the quality of the businesses that we're investing in.

And Todd—I think if you talk to Todd Beiley, who's my co-portfolio manager—on some of the domestic strategies that he runs, I think some of the exposure that he's gotten to the international businesses that we've invested in in Global have gotten him so interested that he's invested in some of those same companies in some of our domestic strategies where ADRs are available.

STEVE: Given that you are considering non-U.S. companies, how do you factor in the macro environment, and can macro environments create opportunities for you? 

CRAIG: Yeah, we like to think that we're adding some value, and it's not from macro forecasting. Certainly, it's the opposite of that. I think going back to that theme before of being maybe contrarian in nature, I think Todd and I share that personality trait. When everybody is worried about the next 12 to 24 months—going back to Brexit, I remember that was something that got a lot of attention and we saw some very attractive valuations there.

We're seeing different headlines about where people are worried about things in Brazil right now—there's a lot of worry about a new administration there. What's the impact going to be from that? We've seen a lot of concerns about the Russian invasion of Ukraine—what's going to be the fallout for some of these companies in Eastern Europe? And we like to, as long as we're appropriately evaluating the risks and we feel like the company has long-term staying power and it’s going to be a great business 5, 10 years from now, we like to take advantage of those opportunities when people are more worried about the next six or 12 months, and we can hopefully get valuations that are more attractive.

STEVE: As you indicated, you co-manage this strategy with Todd Beiley. How do you two work together in determining which stocks to hold in the portfolio? 

CRAIG: Well, the way we think about this portfolio is it's a best ideas portfolio from across our U.S. and non-U.S. strategies. And so basically, Todd on a day-to-day basis is more involved with our domestic U.S. strategies and I'm more involved on a day-to-day basis on the international strategy. So, the two of us get together and we just go through all the names, and we try to figure out, going back to what I said earlier, where are the best businesses around the world trading at the most attractive valuations and let that drive our decision-making on the investment side.

STEVE: But both of you have to agree to own any?

CRAIG: Of course.

10:22 Differentiating From the Benchmark and Our Peers

STEVE: Can you discuss how your approach differs from, say the broad global small-cap benchmark, and how your approach differs from other investors that invest in this asset class?

CRAIG: Yeah, so the benchmark is very easy. I mean, to start off with, you're talking about thousands and thousands of companies in the benchmark. As I mentioned before, within the small-cap space is a very wide range of quality. And I would say on average, the quality is not great, specifically, say within the U.S., I think I saw a recent statistic that over 40% of the companies in the small-cap benchmark are losing money or are nonprofitable. So, with this portfolio, you're getting a much more targeted approach, 40 to 50 of what we think are great franchises that are generating strong profitability, strong balance sheets, excellent free cash flows. It’s just a much more targeted approach, investing in what we think are great businesses and that I think is a clear differentiator from the benchmark.

I know there's going to be a lot of our peers who are going to say that they're doing some of the similar things, but we do think that our emphasis on quality is a little more exacting than some of our peers. We are, I would say, more concentrated than a lot of our peers, and we tend to have pretty low turnover. So those would be the main differentiators.

And then I think specifically, a differentiator from peers that are even similar to us in style, I think our willingness to look different than the benchmark to a large degree is something that we think gives us just one more way to add value. If we're seeing better opportunities, like I said, in Brazil or Japan, wherever the case may be, we don't have one eye on the benchmark at all times, and we're not willing to look significantly different.

So, as an example, what may look like a large overweight, say, in communication services, and people ask questions about that, but it's not something that really bothers us. We own a lot of different companies within that sector, and we think they're all great businesses and we don't think we have an undue concentration there. It's just that there's not a lot of those kinds of companies in the benchmark. And so that makes others sometimes feel nervous whereas we kind of embrace that opportunity.

12:40: Inside the Global Small Cap Portfolio

STEVE: So, let's drill down a bit further. Can you provide a couple of examples of companies you currently own in the portfolio? 

CRAIG: Yeah, sure. I think one of the companies that we added to the portfolio last year is a company called Baltic Classifieds. It's a company, as the name would imply, is in the Baltics, although it is listed in London. This is a business, a little bit of jargon, in online classifieds. Basically, these are businesses that have replaced the newspaper for people to advertise for things like real estate, automotive, or jobs. Obviously, the newspapers have gone away, and all of those businesses have migrated online.

The newspaper business was a phenomenal business for decades and decades. And all those things that made the newspaper business a great business exist to an even greater degree with these online classified businesses. Number one being the network effect. The reason people advertised in the newspaper was because they knew that's where the eyeballs were, and the reason that people looked in the newspapers, that's where they knew the ads were. And we have very concentrated markets in many of these cases and Baltic Classifieds has leading portals across all of those verticals—automotive, real estate, and jobs. And so, it's a business for that reason that has very strong pricing power, which leads to great economics for the business. Profit margins are very high, over 70% in the case of Baltic Classifieds.

And we have a lot of history investing in these types of classifieds businesses. On the international side, we've owned a company called Rightmove in the UK for over 10 years. So, it's a business that we've gotten to know very well. The businesses are in the much earlier stages of monetization in in the Baltics, and so we think there's a long future for Baltic Classifieds to continue to be very successful.

And, going to the opportunistic side, the reason we invested last year is a lot of people were aware of these strong business characteristics with Baltic Classifieds. But being an Eastern European company, former Soviet satellites in the Baltics, when the Russian invasion of Ukraine hit, the company, the shares went down substantially. So, this is a stock that despite having solid underlying performance in the business last year, the stock was down over 40%. And so, that macro fear gave us opportunity to buy a phenomenal business at a very attractive valuation.

STEVE: So, I expect that you would think that this company has a strong network effect?

CRAIG: Absolutely. Yeah.

STEVE: How about another example? 

CRAIG: Another name that we added to the portfolio last year is a company called Fox Factory. Fox Factory is listed in the U.S., and this is a business that has a very strong brand in high-end suspension products for bikes and off-road vehicles. Market share for Fox Factory on high-end mountain bikes is well over 50%. And this is a brand and market position that's been developed over decades that we think would be very difficult for competitors to try to compete against.

STEVE: So, what would make you decide to sell one of your portfolio holdings? And would an important macro headline event cause you to reassess one of your holdings?

CRAIG: Well, the most important thing that we want to use as a reason to sell would be just either a deteriorating competitive position or fear that there may be a deterioration in the competitive position of the business over time. We obviously focus on investing in quality companies, and that's something we view as the most important investment criteria for us. And so, when we see deterioration there, that's something that we want to use as an immediate reason to sell.

And, on the macro, I would say, obviously, it's case by case, but in general, as long as it's not going to be something that is going to completely torpedo the country or torpedo the company, we view macro fears, as it relates to near-term economic risk or things like industry risk, we view those more as an opportunity than a reason to sell. 

STEVE: Can you give an example of a company that you held although the macro news wasn't great?

CRAIG: Well, I talked about Rightmove earlier—this is an online portal that we've owned for many years—and the Brexit vote in 2016 created a lot of uncertainty. A lot of people were worried about the impact on the real estate market in the UK overall. What was going to be the impact for Right Move and real estate agents? And there was just a lot of handwringing as it relates to that and just people were selling first and asking questions later as far as the UK market in general. And certainly, if we look back seven years from now, if you try to find the impact of Brexit on the results of a company like Rightmove, you would have to get out a microscope to see the difference between 2017 and 2016 and 2018. It's just a remarkably resilient, consistent business. So, we think it's a mistake for investors to try to time the market and play musical chairs with great businesses like Rightmove, and so we just stay the course. 

17:42: Closing Thoughts on the Global Small Cap Asset Class

STEVE: Craig, we appreciate your thoughts and comments today. How about we close this podcast with maybe some final comments from you on why investors should consider the global small-cap asset class?

CRAIG: Yeah, I think the interesting thing about this portfolio is it gives you in a quote/unquote one-stop shop, an opportunity to invest in small cap companies around the world. Like I said, within the U.S., outside of the U.S., developed, emerging markets, what we believe are a select group of great businesses that have great long-term prospects. We aim to be long-term shareholders in these great businesses and hopefully allow the results of these great businesses over time to deliver returns for our shareholders over that period. And I think it's been time-tested at Kayne in terms of how we invest, and we think that this portfolio has a place for people that are looking for that kind of solution.

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