The document discusses concentrated investment portfolios and their potential benefits compared to more diversified portfolios. It argues that concentrated portfolios that are limited to well-researched companies meeting strict qualitative and quantitative guidelines can generate above-average returns with less risk. Data is presented showing that over 7- and 10-year periods, concentrated portfolios with 35 or fewer stocks outperformed larger portfolios with over 35 stocks, while also exhibiting lower risk as measured by standard deviation. The key benefit of a concentrated portfolio is that it allows for deeper research on fewer companies to fully understand their competitive advantages and assess the sustainability of their business models.

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2. Kayne Anderson Rudnick
Caleb “Spuds” Powell, CPWA®
, Managing Director; Randall Allen, Senior Vice President;
Darnel Bentz, Senior Vice President; Curt Biren, CPWA®
, AIF®
, Senior Vice President;
Thomas Connaghan, Senior Vice President; Dustin Gale, CFP®
, Senior Vice President;
Diane Spirandelli, CFA®
, Senior Vice President
Los Angeles—San Francisco, CA Leading Wealth Advisor
What are the benefits of
concentrated portfolios?
By Kayne Anderson Rudnick
1
eVestment is a provider of institutional investment data intelligence and analytic solutions. Universes considered include non-U.S. diversified equity, U.S.
large cap, U.S. mid cap, U.S. small-mid cap, U.S. small cap, U.S. all cap and U.S. micro cap.
Information expressed herein is strictly the opinion of Kayne Anderson Rudnick and is provided for discussion purposes only. This report should not be
considered a recommendation or solicitation to purchase securities. Past performance is no guarantee of future results.
I get more and more convinced that
the right method of investment is to
put fairly large sums into enterprises
which one thinks one knows some-
thing about and in the management
of which one thoroughly believes. It
is a mistake to think one limits one’s
risk by spreading too much between
enterprises about which one knows
little and has no reason for special
confidence. —John Maynard Keynes
A concentrated portfolio is a high-
conviction strategy that can play a
key role in a well-executed asset-allo-
cation strategy. A focused group of
well-researched companies, each with
a sustainable competitive advantage,
can provide superior protection
against a permanent loss of capital,
versus a portfolio with a higher num-
ber of holdings with a lower degree
of conviction.
eVestment data through December
showed that concentrated portfolios
(35 or fewer holdings) outperformed
larger, nonconcentrated portfolios
(over 35 holdings) in the prior seven-
and 10-year windows.1
Further, the
same eVestment data showed that
concentrated portfolios experienced
lower levels of risk (as measured by
standard deviation) than noncon-
centrated portfolios did during the
same time frames. Why? By focusing
on fewer companies, portfolio man-
agers can devote more resources to
obtaining a complete picture of those
companies’ competitive protections,
determining if they are sustainable
over time. This creates an appropri-
ate valuation for the business and
promotes educated decision-making
as to whether a business can sustain
its profitability over the next 10 to
15 years, not just the next one to two
earnings cycles.
A common fallacy is that concen-
trated portfolios are inherently more
risky. This misconception exists
because the relationship between
diversification and volatility has
been overstated for years, leading
investors to believe they can diver-
sify away risk only by including a
large number of stocks. Yet, after
a point, adding more stocks does
not reduce risk significantly. In fact,
numerous studies have shown that
a relatively small number of stocks
provides most of the diversification
an investor needs, with the benefit to
a one-stock portfolio being largely
captured within the first few additions.
Accordingly, the decision to add
more securities should be based
on the manager’s conviction, not
the need to diversify, as the latter
tends to water down returns. When
an “active” portfolio looks more like
the benchmark—a scenario referred
to as “over-diversification” or “clos-
eted indexing”—its likelihood of
outperformance decreases. The
larger number of different securities
within the portfolio often means their
equity positions are so small (0.2 per-
cent to 1 percent) that no individual
stock can affect portfolio returns—neg-
atively or positively—with any degree
of significance. The result is simply a
high number of average companies
generating only an average return.
Further, managers who over-diver-
sify typically define risk as track-
ing error (the difference between
the return an investor receives and
that of the benchmark he or she is
attempting to imitate), versus the
potential for permanent loss of capi-
tal, and they choose to buy the bench-
mark to avoid sticking out. However,
this behavior can be counter-produc-
tive because managers’ best ideas
have demonstrated a stronger likeli-
hood of outperforming over time.
We believe a concentrated portfo-
lio can only generate excess returns
if it is accompanied by a superior
research process capable of uncov-
ering quality companies with sus-
tainable long-term competitive
advantages and attractive valua-
tions. By limiting a portfolio to well-
researched companies that meet
strict qualitative and quantitative
guidelines, managers increase their
chances of capturing above-average
returns with less risk.

3. How to reach Kayne Anderson Rudnick
We are oriented toward quality—in our investments, in
our service and in our business practices. To learn more,
please contact us at 800.231.7414.
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Kayne Anderson Rudnick 1800 Avenue of the Stars, 2nd Floor, Los Angeles, CA 90067 800.231.7414
580 California Street, Suite 1750, San Francisco, CA 94104
KayneandersonrudnicK
Assets Under Management
$10 billion (as of 3/31/15)
Largest Client Net Worth
$500 million+
Minimum Fee for Initial Meeting
None required
Minimum Net Worth Requirement $1 million
Professional Services Provided
Investment advisory and money
management services
Compensation Method Asset-based fee (investment services)
Primary Custodian for Investor Assets Fidelity Investments
Financial Services Experience Powell, 21 years; Allen, 16 years;
Bentz, 13 years; Biren, 28 years; Connaghan, 18 years;
Gale, 10 years; Spirandelli, 43 years
Email spowell@kayne.com tconnaghan@kayne.com
rallen@kayne.com dgale@kayne.com
dbentz@kayne.com dspirandelli@kayne.com
cbiren@kayne.com
Website www.kayne.com
ILLUSTRATIoNByKEVINSPRoULS
“The decision to add more securities
should be based on the manager’s
conviction, not the need to diversify.”
—Kayne Anderson Rudnick
Front row: Diane Spirandelli,
Dustin Gale, Caleb “Spuds”
Powell; back row, left to right:
Thomas Connaghan,
Randall Allen, Darnel Bentz;
not pictured: Curt Biren
085w o r t h . c o m a p r i l - m ay 2 0 1 5
About Kayne Anderson Rudnick
Ranked among the Top 10 of Barron’s list of Top Independent Financial Advisors for the last two years,
Kayne Anderson Rudnick is a boutique investment advisory firm founded in 1984 to manage capital for
its founders, including John Anderson (a Forbes 400 billionaire and the benefactor of UCLA’s Anderson
School of Management). With offices in Los Angeles and San Francisco, the company manages assets for
both high net worth individuals and institutions. Its advisors boast an average client relationship length of 11
years and a retention rate of 98 percent, thanks to outstanding client service and personalized investment
strategies designed around clients’ unique circumstances and objectives. Disciplined risk management
and diversification are key components in helping clients achieve their goals. Accordingly, the company’s
comprehensive platform offers proprietary investment strategies and a range of carefully selected,
externally managed investment solutions. With 30 years of experience blending traditional and alternative
investments, Kayne Anderson Rudnick is known for a commitment to high-quality business practices,
investment strategies and wealth solutions.

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Caleb “Spuds” Powell, CPWA®
Managing Director
Randall Allen
Senior Vice President
Darnel Bentz
Senior Vice President
Curt Biren, CPWA®, AIF®
Senior Vice President
Thomas Connaghan
Senior Vice President
Dustin Gale, CFP®
Senior Vice President
Diane Spirandelli, CFA®
Senior Vice President
Kayne Anderson Rudnick
1800 Avenue of the Stars, 2nd
Floor
Los Angeles, CA 90067
580 California Street, Suite 1750
San Francisco, CA 94104
Tel. 800.231.7414
spowell@kayne.com
rallen@kayne.com
dbentz@kayne.com
cbiren@kayne.com
tconnaghan@kayne.com
dgale@kayne.com
dspirandelli@kayne.com
www.kayne.com