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: 2/28/2017
Annualized Returns (%)
Periods Ended: 12/31/2016
1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years
Micro-Cap (gross) 0.56 1.96 -3.19 26.05 8.02 16.92 -
Micro-Cap (net) 0.45 1.64 -3.40 24.51 6.69 15.49 -
Russell Microcap Index 1.04 4.05 -0.48 20.37 5.77 15.59 -
Micro-Cap
Monthly Returns(%) as of 2/28/2017 Gross Net
1 Month 0.56 0.45
3 Months 1.96 1.64
YTD -3.19 -3.40
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 30.29 28.70
3 Years 6.76 5.44
5 Years 14.10 12.70
10 Years -
Russell Microcap Index
Monthly Returns(%) as of2/28/2017 Gross Net
1 Month 1.04 -
3 Months 4.05 -
YTD -0.48 -
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 35.65 -
3 Years 4.23 -
5 Years 13.12 -
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 -4.88 2.57 46.46 15.94 -3.25 33.50 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 -4.88
2014 3.86 2.57
2013 48.06 46.46
2012 17.11 15.94
2011 -2.26 -3.25
2010 35.23 33.50
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 12/31/2016

 

Market Environment

The fourth quarter was kind to micro-cap stocks as the Russell Microcap® Index rose 10.05% for the period. Inexpensive stocks ruled as companies with high cash flow to price and other positive valuation metrics outperformed. Stocks with high return on equity and higher quality (as measured by the Piotroski score) also outperformed. Stocks with high volatility and higher historical trading volume underperformed less-volatile and less-liquid stocks.

Portfolio Commentary

For the fourth quarter, the Denver Investments’ Micro-Cap portfolio outperformed its benchmark, the Russell Microcap® Index, which returned 10.05%. The models used to help manage and select stocks for the portfolio did well across the investment spectrum for the quarter. On an absolute basis, portfolio provided positive returns in all eleven sectors for the quarter, led by financials and consumer discretionary. The benchmark’s returns were positive in 10 out of 11 sectors on an absolute basis. The portfolio outperformed the benchmark in 9 out the 11 sectors.

Contributors to Return

The portfolio’s best-performing sectors, relative to the benchmark, were health care, consumer discretionary, and information technology. Among the portfolio’s best-performing holdings this quarter was National Western Life Group., a global provider of insurance products. The company’s life insurance business has been outperforming expectations and the company made adjustments to its financial statements to reflect the better-than-expected results. Harsco Corp., a diversified, worldwide industrial services company, was another significant contributor to the portfolio’s performance in the quarter. The company reported cash flow that was significantly higher than expectations. This was driven by its metals and minerals segment, along with improving market conditions. Another strong performer was Michigan-based Macatawa Bank Corp. Its third quarter earnings topped expectations driven by lower expenses and a more favorable tax rate.

Detractors from Return

The portfolio’s weakest sectors relative to the benchmark were financials, utilities, and materials. Among the portfolio’s detractors in the quarter was VASCO Data Security International Inc., which provides security with two-factor authentication, transaction data signing, and identity management. The stock struggled after the company reported lower-than-expected earnings during the quarter. Further hurting the stock, VASCO reduced its full year earnings estimates as the firm’s largest customers in Europe have been holding back orders for security tools. American Outdoor Brands Corp. (formerly Smith & Wesson Holding Corp.), one of the world's leading providers of firearms, also hampered performance in the quarter. The stock struggled as expectations of stricter gun-control measures dissipated after the election. Another underperformer in the quarter was Healthways Inc., a well-being and wellness provider for employers, health plans, and health systems. Its stock underperformed after the company reported third quarter earnings that fell short of expectations.

Outlook and Positioning

The results of the U.S. elections surprised most, but the overall the effect on micro-cap stocks was positive. As pessimism was replaced by optimism, the market was able to leverage off the improving fundamentals we had started to see over the last few quarters. While certainly the long-term outlook may appear a bit murky, and global markets could once again slip back into the same story of stagnant global growth, there are signs that stocks, especially small- and micro-cap stocks, could be poised for a strong 2017. Should the government pass some form of fiscal stimulus, it would likely have a positive effect on small companies, who are also poised to benefit from better credit availability. Relative to their large-cap brethren, we believe micro-cap stocks still remain undervalued based on long-term valuation spreads.



Stock Performance (3 months ended 12/31/2016)
Top 5 Stocks Average Weight Contribution to Return
Harsco Corporation 1.48% 0.55%
Macatawa Bank Corporation 1.32 0.39
National Western Life Group, Inc. Class A 0.78 0.35
First Busey Corporation 1.00 0.35
CenterState Banks, Inc. 0.91 0.35
Bottom 5 Stocks Average Weight Contribution to Return
Healthways, Inc. 1.50% -0.32%
DHI Group, Inc. 0.21 -0.27
American Outdoor Brands Corporation 0.65 -0.16
VASCO Data Security International, Inc. 0.50 -0.16
Inovio Pharmaceuticals, Inc. 0.12 -0.15
Top 5 Stocks
Harsco Corporation
Average Weight 1.48%
Contribution to Return 0.55%
Macatawa Bank Corporation
Average Weight 1.32
Contribution to Return 0.39
National Western Life Group, Inc. Class A
Average Weight 0.78
Contribution to Return 0.35
First Busey Corporation
Average Weight 1.00
Contribution to Return 0.35
CenterState Banks, Inc.
Average Weight 0.91
Contribution to Return 0.35
Bottom 5 Stocks
Healthways, Inc.
Average Weight 1.50%
Contribution to Return -0.32%
DHI Group, Inc.
Average Weight 0.21
Contribution to Return -0.27
American Outdoor Brands Corporation
Average Weight 0.65
Contribution to Return -0.16
VASCO Data Security International, Inc.
Average Weight 0.50
Contribution to Return -0.16
Inovio Pharmaceuticals, Inc.
Average Weight 0.12
Contribution to Return -0.15

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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