Small-Cap Growth

Growth Equity

Investment Strategy

Denver Investments’ Small-Cap Growth strategy is based on the belief that equity prices reflect expectations for earnings and cash flow. The team believes that identifying companies with superior growth prospects and fundamental stability early leads to consistent outperformance over time. Through rigorous independent fundamental research, the lead portfolio managers construct a portfolio designed to generate alpha primarily through stock selection.

Portfolio Management

We seek to invest in growth companies with disruptive products or services, large market opportunities and strong competitive positions that are less sensitive to macroeconomic factors – Brian C. Fitzsimons, CFA

Brian C. Fitzsimons, CFA

Brian C. Fitzsimons, CFA

Partner, Director of Small-Cap Growth Research, Portfolio Manager

Mitch S. Begun, CFA

Mitch S. Begun, CFA

Partner, Portfolio Manager, Analyst

Adam C. Bliss

Partner, Portfolio Manager, Analyst

Portfolio Construction Guidelines:

  • Approximately 70-100 stocks
  • Typical position size of 1% to 3%; maximum of 5%
  • Sector sensitive: +/-10% of absolute sector weight of the benchmark
  • Fully invested: target less than 10% in cash
Benchmark:

Russell 2000® Growth Index

Investment Minimum:

$10,000,000

See composite descriptions and index descriptions. The guidelines listed are representative of the product but are not considered restrictions. Specific client guidelines may differ.

Investment Team

Brian C. Fitzsimons, CFA
Brian C. Fitzsimons, CFA

Partner, Director of Small-Cap Growth Research, Portfolio Manager

2005 to Present: Denver Investments
2004 to 2005: Newmont Capital Ltd., Finance Manager
2002 to 2004: A.G. Edwards & Sons, Inc., Equity Analyst
2002: Berger Financial Group, Equity Analyst
1999 to 2002: Women’s Pro Softball League, Director of Finance/Controller
2000 to 2001: Marsico Endowment Fund, Portfolio Manager
Education:

BS – Metropolitan State College of Denver; MBA – University of Denver
Member of CFA Institute and CFA Society Colorado

Mitch S. Begun, CFA
Mitch S. Begun, CFA

Partner, Portfolio Manager, Analyst

2003 to Present: Denver Investments
2000 to 2002: Raymond James & Associates, Equity Research Associate
Education:

BSBA – University of North Carolina at Chapel Hill
Member of CFA Institute and CFA Society Colorado

Adam C. Bliss

Partner, Portfolio Manager, Analyst

2004 to Present: Denver Investments
1997 to 2003: Berger Funds, Co-Portfolio Manager and Equity Analyst
Education:

BSBA – Saint Mary’s College of California; MBA – University of Denver

Mark S. Truelsen, CFA
Mark S. Truelsen, CFA

Vice President, Analyst

2001 to Present: Denver Investments
2000 to 2001: RJ Falkner & Co., Junior Research Analyst
1999: Skyline Asset Management, Marketing Assistant
1998 to 1999 Scudder Kemper Investments, Investment Representative
Education:

BA – University of Illinois at Urbana-Champaign
Member of CFA Institute and CFA Society Colorado

Georgene L.A. Pedrie
Georgene L.A. Pedrie

Vice President, Senior Equity Trader

2002 to Present: Denver Investments
1987 to 2002: NDB Capital Market, Sales Trader
Education:

BA and MA – University of Northern Colorado

Tara Stacy
Tara Stacy

Equity Trader

2009 to Present: Denver Investments
1999 to 2009: LGC Management, Accountant
Education:

BA – University of Colorado Denver; CFA Institute Claritas certificate

Performance (%)

  Monthly Returns (%)
Periods Ended: 2/28/2017
Annualized Returns (%)
Periods Ended: 12/31/2016
1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years
Small-Cap Growth (gross) 3.05 6.47 8.07 9.81 3.72 13.89 -
Small-Cap Growth (net) 2.97 6.21 7.90 8.72 2.68 12.77 -
Russell 2000 Growth Index 2.45 5.54 4.12 11.32 5.05 13.74 -
Small-Cap Growth
Monthly Returns(%) as of 2/28/2017 Gross Net
1 Month 3.05 2.97
3 Months 6.47 6.21
YTD 8.07 7.90
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 35.63 34.31
3 Years 3.80 2.77
5 Years 13.39 12.27
10 Years -
Russell 2000 Growth Index
Monthly Returns(%) as of2/28/2017 Gross Net
1 Month 2.45 -
3 Months 5.54 -
YTD 4.12 -
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 30.91 -
3 Years 5.42 -
5 Years 12.29 -
10 Years -

Calendar Year Performance (%)

2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Small-Cap Growth (Gross) 9.81 -3.45 5.23 53.21 12.09 -1.80 - - - -
Small-Cap Growth (Net) 8.72 -4.41 4.18 51.74 11.00 -2.74 - - - -
Russell 2000 Growth Index 11.32 -1.38 5.60 43.30 14.59 -2.91 - - - -
Small-Cap Growth
Year Gross Net
2016 9.81 8.72
2015 -3.45 -4.41
2014 5.23 4.18
2013 53.21 51.74
2012 12.09 11.00
2011 -1.80 -2.74
2010 - -
2009 - -
2008 - -
2007 - -
Russell 2000 Growth Index
Year Gross Net
2016 11.32 -
2015 -1.38 -
2014 5.60 -
2013 43.30 -
2012 14.59 -
2011 -2.91 -
2010 - -
2009 - -
2008 - -
2007 - -

Data is based on the firm’s composite for this strategy. Past performance does not guarantee future results and future performance may be lower or higher than the performance presented, including the possibility of loss of principal. Composite returns for one year or greater are annualized.

Returns are computed and stated in U.S. dollars. Performance is calculated net of withholding taxes on foreign dividends and interest, if any, and reflect the reinvestment of dividends and other earnings.

Gross of fee returns are calculated gross of management and custodial fees and net of transaction costs. Net of fee returns are calculated net of management fees and transaction costs and gross of custodian fees. As of 1/1/15, net of fee returns were calculated by deducting the maximum applicable advisory fee in effect, pro-rated on a monthly basis. From 1/1/08 to 12/31/14, net of fee returns were calculated by deducting the maximum applicable advisory fee in effect, pro-rated on a quarterly basis. Prior to this date, net of fees returns were calculated using actual annual client fees, pro-rated on a quarterly basis.

The Russell 2000® Growth Index is an unmanaged index measuring the small growth segment of the U.S. equity universe that is constructed to provide a comprehensive and unbiased barometer of the small-cap growth market. FTSE Russell is the source and owner of the Russell Index data. See Terms of Use for additional disclosure.

Index returns are provided to represent the investment environment existing during the time periods shown. For comparison purposes, the index is fully invested, which includes the reinvestment of dividends and capital gains. The returns for the index do not include any transaction costs, management fees or other costs. Composition of each individual portfolio may differ from securities in the corresponding benchmark index. The index is used as a performance benchmark only, as Denver Investments does not attempt to replicate an index. See composite descriptions.

Denver Investment Advisors LLC (dba Denver Investments) is an independent investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Denver Investments provides fundamental investment management services to various institutional and private investors and mutual funds.

Denver Investments claims compliance with the Global Investment Performance Standards (GIPS®).

See performance disclosure for a presentation that complies with the requirements of the GIPS standards. Please contact us to request a complete list and description of all firm composites.

Manager Commentary as of 12/31/2016

 

Market Overview

Equities continued the march higher in the fourth quarter with a strong post-election rally. However, peeling back the layers of the onion, there was wide dispersion in returns. More specifically value stocks, led by financials, staged a significant advance with the Russell 2000® Value Index, finishing the quarter up 14.07% and the year up 31.74%. In comparison, the Russell 2000® Growth Index returned just 3.57% for the quarter and 11.32% for the year.  The magnitude of this divergence is remarkable. Since 1995, growth stocks have underperformed value stocks more significantly in just two years, occurring consecutively with the dotcom crash of 2000 and 2001. The backdrop, in our opinion, is not remotely similar to that period. Thus, we view the disparity in relative performance as extreme and believe it is likely to revert meaningfully should the newly anticipated acceleration in economic prospects fail to meet rapidly growing expectations.

Portfolio Commentary

For the fourth quarter of 2016, Denver Investments’ Small-Cap Growth portfolio  underperformed its benchmark, the Russell 2000® Growth Index, which returned 3.57%.

Contributors to Return

The three sectors that contributed most to the portfolio’s performance relative to its benchmark in the quarter were financials, energy, and consumer staples. The portfolio’s best-performing stock in the quarter was Saia Inc., a provider of less-than-truckload and logistics services across the United States. Its stock outperformed considerably during the fourth quarter due to a more positive freight environment, coupled with the announcement of a planned expansion into the Northeast, which may generate substantial value over time. Within financials, Evercore Partners Inc. was the portfolio’s top contributor in the quarter. This boutique investment banking and securities research firm performed well amidst the market’s anticipation of a more conducive environment for merger and acquisition transactions from potential new U.S. administration initiatives. Microsemi Corp., a semiconductor manufacturer, was strong in the period after posting solid quarterly results, as well as being reported in the press as a potential acquisition target. The company, in our opinion, has attractive growth prospects across a multitude of end markets, such as aerospace/defense and data centers, in addition to an improving financial model with increasing margins and decreasing leverage.

Detractors from Return

The three sectors that detracted most from the portfolio’s performance relative to its benchmark in the quarter were industrials, materials, and information technology. The portfolio’s worst-performing stock in the quarter was Nevro Corp., a developer of innovative spinal cord stimulation devices for the treatment of chronic pain. The stock underperformed during the fourth quarter based on the general threat of competition into 2017 and beyond. We believe Nevro’s patent-protected Senza offering delivers a best-in-class clinical outcome with fewer side effects and creates the ability for the company to expand its market into modalities not typically treated with neuromodulation therapy. The Advisory Board Co., a provider of performance improvement software and solutions to the health care and higher education industries, was another significant detractor in the quarter. Faced with the prospect of a new presidential administration, and what that might mean for health care policy going forward, many health care providers reduced spending on consulting during the quarter. Our belief is that this slowdown is more transient in nature as health care providers, now more than ever, require access to best practices research with which to improve returns in this constantly changing environment. Flotek Industries Inc., a chemicals provider for the oilfield services industry, was also a meaningful drag on performance in the quarter. Its stock came under pressure due to a report questioning Flotek’s product efficacy. We have confidence in the long-term opportunity for Flotek and its Complex nano-Fluid product suite based on product quality verifications from third-party, well-regarded engineering firms as well as tier-one oilfield service companies and customers.

Outlook and Positioning

As of the end of 2016, the portfolio was overweighted in the financials and consumer discretionary sectors and underweighted primarily in industrials and the recently formed real estate sector. While economic prospects appear to have picked up for 2017 on the promise of a pro-growth policy agenda, in our opinion, we remain in the later stages of the business cycle. We believe that growth stocks represent significant value in the market today given the magnitude of outperformance from cyclical areas of the market. We have been actively adding to positions that, in our estimation, have strong, longer-term growth prospects, but have recently underperformed despite continued strong fundamentals. We believe this is a winning strategy over time and our focus remains on building a portfolio of the next-generation of great growth companies.



Stock Performance (3 months ended 12/31/2016)
Top 5 Stocks Average Weight Contribution to Return
Saia, Inc. 1.56% 0.83%
Microsemi Corporation 2.67 0.71
Evercore Partners Inc. Class A 2.09 0.62
Grand Canyon Education, Inc. 1.31 0.57
Bank of the Ozarks, Inc. 1.43 0.46
Bottom 5 Stocks Average Weight Contribution to Return
Nevro Corp. 2.64% -0.99%
Advisory Board Company 2.08 -0.70
Zendesk, Inc. 1.71 -0.65
Endologix, Inc. 0.74 -0.65
Flotek Industries, Inc. 1.14 -0.49
Top 5 Stocks
Saia, Inc.
Average Weight 1.56%
Contribution to Return 0.83%
Microsemi Corporation
Average Weight 2.67
Contribution to Return 0.71
Evercore Partners Inc. Class A
Average Weight 2.09
Contribution to Return 0.62
Grand Canyon Education, Inc.
Average Weight 1.31
Contribution to Return 0.57
Bank of the Ozarks, Inc.
Average Weight 1.43
Contribution to Return 0.46
Bottom 5 Stocks
Nevro Corp.
Average Weight 2.64%
Contribution to Return -0.99%
Advisory Board Company
Average Weight 2.08
Contribution to Return -0.70
Zendesk, Inc.
Average Weight 1.71
Contribution to Return -0.65
Endologix, Inc.
Average Weight 0.74
Contribution to Return -0.65
Flotek Industries, Inc.
Average Weight 1.14
Contribution to Return -0.49

The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will vary, and initial investments may be worth more or less than their original investment. To obtain current performance as of the most recent month-end and for important performance disclosures, please view the fact sheet.

The securities identified on this chart were determined after consistently calculating the weight of each holding in the representative account multiplied by the rate of return for that holding during the period. The securities identified do not represent all of the securities purchased, sold or recommended for advisory clients. You may obtain a complete list showing the contribution of each holding in the representative account to the overall account performance during the period presented by emailing us or calling 303.312.5000.

The Manager Commentaries contain certain forward-looking statements about the factors that may affect future performance. These statements are based on portfolio management’s predictions and expectations concerning certain future events and their expected impact on the strategy, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors that may influence the future performance of the strategy. Portfolio management believes these forward-looking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed.

See performance disclosure for a presentation that complies with the requirements of the GIPS standards. Please contact us to request a complete list and description of all firm composites.

All indices are unmanaged and investors cannot invest directly in an index. View index descriptions.

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