Micro-Cap

Quantitative Equity

Investment Strategy

Denver Investments’ Micro-Cap strategy is based on the belief that inefficiencies in the micro-cap universe are best exploited through a disciplined quantitative approach. The team utilizes sector-specific modeling based on proprietary factors that combine quantitative and fundamental insights. The team constructs the portfolio through an optimization process designed to maximize returns and minimize risk relative to the benchmark.

Portfolio Management

We employ a quantitative approach to investing, one that utilizes fundamental factors, which we believe are predictive of long-term stock price performance. – Paul A. Kuppinger, CFA

Paul A. Kuppinger, CFA

Paul A. Kuppinger, CFA

Vice President, Portfolio Manager, Quantitative Analyst

Portfolio Construction Guidelines:

  • Approximately 150-200 stocks
  • Maximum initial position size of 85 bps
  • Sector sensitive: +/- 3% of the absolute sector weight of the benchmark
  • Fully invested: typically less than 5% cash

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

Paul A. Kuppinger, CFA
Paul A. Kuppinger, CFA

Vice President, Portfolio Manager, Quantitative Analyst

2006 to Present: Denver Investments
2003 to 2006: Rocky Mountain Wealth Advisors, Principal
2002 to 2003: Curian Capital, Vice President of Research
1998 to 2002: Prima Capital, Director of Research
1997 to 1998: KPMG, Research Analyst
1993 to 1995: Westcap Investors, Trader
1990 to 1993: Wilshire Associates, Supervisor of Performance Measurement
Education:

BA – The Colorado College; MBA – University of Colorado
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: 5/31/2017
Annualized Returns (%)
Periods Ended: 3/31/2017
1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years
Micro-Cap (gross) -3.10 -0.47 -3.64 24.77 6.71 13.38 -
Micro-Cap (net) -3.21 -0.78 -4.15 23.25 5.39 11.99
Russell Microcap Index -2.29 -0.43 -0.91 27.77 4.86 12.43 -
Micro-Cap
Monthly Returns(%) as of 5/31/2017 Gross Net
1 Month -3.10 -3.21
3 Months -0.47 -0.78
YTD -3.64 -4.15
Annualized Returns(%) as of 5/31/2017 Gross Net
1 Year 21.95 20.46
3 Years 8.10 6.77
5 Years 15.58 14.16
10 Years -
Russell Microcap Index
Monthly Returns(%) as of5/31/2017 Gross Net
1 Month -2.29 -
3 Months -0.43 -
YTD -0.91 -
Annualized Returns(%) as of 5/31/2017 Gross Net
1 Year 20.59 -
3 Years 6.62 -
5 Years 14.01 -
10 Years -

Calendar Year Performance (%)

2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Micro-Cap (Gross) 26.05 -3.72 3.86 48.06 17.11 -2.26 35.23 17.07 -19.49 -
Micro-Cap (Net) 24.51 -4.92 2.57 46.46 15.94 -3.25 33.5 15.55 20.04 -
Russell Microcap Index 20.37 -5.16 3.66 45.62 19.75 -9.27 28.89 27.48 -28.71* -
Micro-Cap
Year Gross Net
2016 26.05 24.51
2015 -3.72 -4.92
2014 3.86 2.57
2013 48.06 46.46
2012 17.11 15.94
2011 -2.26 -3.25
2010 35.23 33.5
2009 17.07 15.55
2008 -19.49 20.04
2007 - -
Russell Microcap Index
Year Gross Net
2016 20.37 -
2015 -5.16 -
2014 3.66 -
2013 45.62 -
2012 19.75 -
2011 -9.27 -
2010 28.89 -
2009 27.48 -
2008 -28.71* -
2007 - -

*2008 calendar year returns for the product and benchmark are for the period 7/1/2008 through 12/31/2008.

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 Microcap® Index measures the performance of the microcap segment of the U.S. equity market. It makes up less than 3% of the U.S. equity market. It includes 1,000 of the smallest securities in the Russell 2000 Index based on a combination of their market cap and current index membership and it includes the next 1,000 securities. 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 3/31/2017

 

Market Environment

The post-election euphoria that drove micro-cap stocks wavered a bit as 2017 began. The first quarter was unkind to micro-cap stocks as the Russell Microcap® Index rose a meager 0.38% for the period. Stocks that we view as expensive ruled, as companies with high cash flow to price and other positive valuation metrics underperformed. Stocks with high return on equity and higher quality (as measured by the Piotroski score) also underperformed. Stocks with high volatility and higher historical trading volume outperformed less-volatile and less-liquid stocks.

Portfolio Commentary

For the first quarter, the Denver Investments’ Micro-Cap portfolio underperformed its benchmark, the Russell Microcap® Index, which returned 0.38%. The models used to help manage and select stocks for the portfolio did poorly across the investment spectrum for the quarter. On an absolute basis, the portfolio provided positive returns in only the health care and telecommunication services sectors for the quarter. The benchmark had positive returns in 3 out of 11 sectors on an absolute basis. The portfolio outperformed the benchmark in 4 out the 11 sectors.

Contributors to Return

The portfolio’s best-performing sectors, relative to the benchmark, were telecommunications, energy, and consumer staples. Among the portfolio’s best-performing holdings this quarter was Fortress Biotech Inc., a biopharmaceutical company dedicated to creating a portfolio of novel pharmaceutical and biotechnology products. The company reported better-than-expected annual results for 2016. Tivity Health Inc., a fitness program provider for seniors, was another significant contributor to the portfolio’s performance in the quarter. The company reported significantly higher earnings per share than expectations and management provided better-than-expected 2017 guidance for earnings estimates. Another strong performer was Pennsylvania-based OraSure Technologies Inc. This medical device company landed a major new customer, Helix, which allowed the firm to gain additional traction in its DNA Genotek business.

Detractors from Return

The portfolio’s weakest sectors relative to the benchmark were health care, information technology, and industrials. Among the portfolio’s detractors in the quarter was NACCO Industries Inc., an operating holding company with subsidiaries in mining, small appliances, and specialty retail. The stock struggled after the forthcoming infrastructure plan was delayed. ICF International Inc., a provider of professional services and technology-based solutions, also hampered performance in the quarter. Lower-than-expected revenues caused fourth quarter earnings to fall short of street predictions. Another underperformer in the quarter was Bancorp Inc., a provider of private label banking and technology solutions to non-bank companies. Its stock underperformed after the company took another significant mark against a discontinued loan portfolio and its investment in an unconsolidated entity, which led it to incur losses for 2016.

Outlook and Positioning

 As the reality set in that proposed pro-growth changes in government policies were going to take time, many of the stocks that did well post-election floundered during the first quarter. However there are signs of optimism for small companies. U.S. consumer confidence remains high, and if unemployment continues to fall, workers should have more leverage in demanding higher wages, which may lead to the elusive wage growth that truly drives an economic recovery. Additionally, while the Federal Reserve increased the target for the Federal Funds rate for a second consecutive quarter, the Fed’s tone remained fairly ‘dovish’, indicating that, while it still expects interest rates to rise, it would be done so at a thoughtful pace. Combined, we believe these two trends would be very positive for micro-cap stocks.



Stock Performance (3 months ended 3/31/2017)
Top 5 Stocks Average Weight Contribution to Return
OraSure Technologies, Inc. 0.96% 0.38 %
Tivity Health, Inc. 1.16 0.28
Extreme Networks, Inc. 0.49 0.20
Fortress Biotech, Inc. 0.57 0.20
Resource Capital Corp. 0.22 0.18
Bottom 5 Stocks Average Weight Contribution to Return
Bancorp, Inc. 0.68% -0.32%
ICF International, Inc. 0.92 -0.27
NACCO Industries, Inc. Class A 0.83 -0.22
Harsco Corporation 1.22 -0.18
Atwood Oceanics, Inc. 0.54 -0.17
Top 5 Stocks
OraSure Technologies, Inc.
Average Weight 0.96%
Contribution to Return 0.38 %
Tivity Health, Inc.
Average Weight 1.16
Contribution to Return 0.28
Extreme Networks, Inc.
Average Weight 0.49
Contribution to Return 0.20
Fortress Biotech, Inc.
Average Weight 0.57
Contribution to Return 0.20
Resource Capital Corp.
Average Weight 0.22
Contribution to Return 0.18
Bottom 5 Stocks
Bancorp, Inc.
Average Weight 0.68%
Contribution to Return -0.32%
ICF International, Inc.
Average Weight 0.92
Contribution to Return -0.27
NACCO Industries, Inc. Class A
Average Weight 0.83
Contribution to Return -0.22
Harsco Corporation
Average Weight 1.22
Contribution to Return -0.18
Atwood Oceanics, Inc.
Average Weight 0.54
Contribution to Return -0.17

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.

Micro-Caps: Expanding the Investment Opportunity Set

The investment team shares its thoughts on why micro-cap stocks present a unique opportunity to long-term investors.

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Benchmark:

Russell Microcap® Index

Investment Minimum:

$10,000,000

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