US FUND Q&A: Kayne Anderson's Sherry sees value in large caps

(Refiles to fix name to Virtus quality large-cap value fund)

By Chuck Mikolajczak

NEW YORK, March 11 (Reuters) - While many investors expect a choppy Wall Street in 2010 in the wake of last year's run-up, fund manager Richard Sherry at Kayne Anderson Rudnick believes protection can be found in a concentrated portfolio of solid businesses.

Sherry, manager of the Virtus quality large-cap value fund at Kayne Anderson Rudnick, says a diversified, but smaller portfolio of 20 to 35 names comprising high-quality businesses spread across sectors will outperform in rising markets and minimize losses in a downturn.

Kayne Anderson, a wholly owned subsidiary of Virtus Investment Partners, company has $4 billion in assets. Virtus collectively has $25.4 billion in assets. Q: ARE YOU PROTECTED AGAINST A CHOPPY MARKET THIS YEAR? A: Obviously in 2008 being a tough year, we did (have) protection on the downside. With the market down about 37 percent we were down 31 percent.

As we've come into this year, it's going to get more choppy, the market is in a bit of a range. We tend to do better when the focus is on quality and risk-aversion. But what we are going to see is the businesses that we own, the higher quality businesses that don't have to worry so much about access to the capital markets, that are generally self-funding, that have some kind of competitive advantage -- whether it's a strong brand name, a low cost position, a network effect, some kind of advantage -- those businesses will do well. Q: WHAT IS YOUR BEST INVESTMENT THIS YEAR? WHY? DO YOU STILL OWN IT? A: TJX Companies Inc (TJX.N), the discount retailer, a business that we like, we've had our eye on it for a number of years. We thought it was somewhat expensive, and we purchased it back in October of 2008 when a lot of things all of a sudden got very cheap and very attractively priced, so we added to that position at that time. Coca-Cola Co (KO.N), 3M Co (MMM.N) as well. But that has been our best performer year to date and we still own it. Q: WHAT WAS YOUR WORST INVESTMENT? WHY? DO YOU STILL OWN IT? A: Western Union Co (WU.N), which we still own, with the recent pullback we added to it, we still think longer term there is a lot of positive fundamentals on the business. There was some short-term disappointment in some of the numbers but overall the numbers were pretty good. This is a business with very strong returns on the capital it employs despite everything. Their operating earnings grew 4-and-a-half percent last year. We just used that opportunity to add to that position. Q: DO YOU LOOK FOR COMPANIES WITH RECOGNIZABLE BRAND NAMES? A: Brand names as something that is a characteristic of quality, Coca-Cola, that is one way to do it. TJX is sort of a low-cost producer in the retail segment. It's going to be very difficult for Macy's (M.N) or any of these department stores to beat them on price in the long-term.

Short term, yes -- if they want to clear out some inventory and they did that at the end of 2008 -- they can. But you go to a TJX store relative to a Macy's, it's a world of difference, but it gives them that advantage that is very sustainable.

Western Union, a company that has been a little bit down this year, but you've got the network effect where you've got all these branches everywhere around the globe, very difficult to replicate. Every time you add a branch somewhere it makes it a stronger proposition for the customer and then the more customers you have, the stronger it is for someone to want to have a branch with you, and that sort of network effect builds on itself. That is why you have the very strong returns and margins that you have. Q: ARE THERE ANY PARTICULAR SECTORS YOU SEE DOING WELL -- RETAILERS VERSUS DISCOUNT STORES, FOR EXAMPLE? A: It's not so much the discount guys, it's the business model. The fact that they have that low-cost advantage and it is somewhat difficult to replicate.

A lot of our businesses as we screen through, we get a lot of consumer staples businesses -- Clorox Corp (CLX.N), HJ Heinz Co (HNZ.N), Kimberly-Clark Corp (KMB.N) -- these are just good businesses. A little bit more mature, but they just reinvest the cash, get a very strong return and they share that with shareholders, with what tend to be higher than average payout ratios. Q: DO YOU THINK THE TREND WILL BE TO INVEST UP THE MARKET CAP SCALE THIS YEAR? A: We give ourselves flexibility. We aren't going to be flexible in terms of quality. If (large-cap) is where the better value lies, we have the opportunity to go there. Today I find more value in large cap. You go back a number of years, large cap stocks were expensive, so after a number of years of being a little expensive, now they are cheaper than the market and that is where we are finding value today.