Smid-Cap Value

Value Equity

Investment Strategy

Denver Investments’ Smid-Cap Value strategy is based on the belief that the market rewards companies over time for their free cash flow rather than their reported earnings. The strategy utilizes a bottom-up approach, which is grounded in independent fundamental research. Analysts seek to invest in dividend-paying companies where the future free cash flow and return on invested capital are undervalued by the market. The team constructs a diversified portfolio designed to generate alpha primarily through stock selection.

Portfolio Management

We look for dividend-paying, cash-flow generating businesses at attractive prices. By combining the ‘best ideas’ from our Small-Cap and Mid-Cap strategies, we believe we create a powerful approach that may preserve capital in down markets while also participating in up markets. – Derek R. Anguilm, CFA

Derek R. Anguilm, CFA

Derek R. Anguilm, CFA

Partner, Co-Director of Value Research, Portfolio Manager

Troy Dayton, CFA

Troy Dayton, CFA

Partner, Co-Director of Value Research, Portfolio Manager

Mark M. Adelmann, CFA, CPA

Mark M. Adelmann, CFA, CPA

Partner, Portfolio Manager, Analyst

Lisa Z. Ramirez, CFA

Lisa Z. Ramirez, CFA

Partner, Portfolio Manager, Analyst

Alex A. Ruehle, CFA

Alex A. Ruehle, CFA

Partner, Portfolio Manager, Analyst

Portfolio Construction Guidelines:

  • Approximately 60-80 stocks
  • Initial position size of 1% to 3%; maximum of 5%
  • Sector sensitive: +/- 5% of the absolute sector weight of the benchmark
  • Fully invested: typically less than 5% cash
Benchmark:

Russel 2500 TM Value 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

Derek R. Anguilm, CFA
Derek R. Anguilm, CFA

Partner, Co-Director of Value Research, Portfolio Manager

2000 to Present: Denver Investments
1999: Everen Securities, Research Assistant
Education:

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

Troy Dayton, CFA
Troy Dayton, CFA

Partner, Co-Director of Value Research, Portfolio Manager

2002 to Present: Denver Investments
2001 to 2002: Jurika and Voyles, Equity Research Analyst
1998 to 2001: Dresdner RCM Global Investors, Equity Research Associate
1996 to 1998: Jurika and Voyles, Equity Research Associate
1996: Citibank, Trading Support Officer
Education:

BSBA – Colorado State University
Member of CFA Institute and CFA Society Colorado

Mark M. Adelmann, CFA, CPA
Mark M. Adelmann, CFA, CPA

Partner, Portfolio Manager, Analyst

1995 to Present: Denver Investments
1979 to 1995: Deloitte & Touche, Senior Manager
Education:

BS – Oral Roberts University
Member of CFA Institute and CFA Society Colorado
Member of the American Institute of CPAs and the Colorado Society of CPAs

Lisa Z. Ramirez, CFA
Lisa Z. Ramirez, CFA

Partner, Portfolio Manager, Analyst

1989 to Present: Denver Investments
Education:

BS – University of Colorado; MBA – Regis University
Member of CFA Institute and CFA Society Colorado

Alex A. Ruehle, CFA
Alex A. Ruehle, CFA

Partner, Portfolio Manager, Analyst

2008 to Present: Denver Investments
2006 to 2007: First Western Financial Services, Inc., Intern
Education:

BS and MBA – University of Denver
Member of CFA Institute and CFA Society Colorado

Jennifer B. Oldland
Jennifer B. Oldland

Vice President, Analyst

2006 to Present: Denver Investments
Education:

BS – Colorado State University

Guangyan (Yan) Qin, CFA
Guangyan (Yan) Qin, CFA

Vice President, Analyst

2008 to Present: Denver Investments
2007: Investment Protection Services, Wealth Management Intern
2007: First Data Corporation, Treasury Analyst Intern
2005: China Construction Bank, Intern
Education:

BS – University of International Business and Economics, Beijing, China
MS – University of Denver
Member of CFA Institute and CFA Society Colorado

Robbie A. Steiner, CFA
Robbie A. Steiner, CFA

Vice President, Analyst

2014 to Present: Denver Investments
2012 to 2013: BMO Capital Markets, Investment Banking Associate
2008 to 2010: Transamerica Investments, Mutual Fund Wholesaler
Education:

BBA – University of Georgia, MBA – Emory University
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
Smid-Cap Value (gross) 1.11 5.54 1.45 33.17 12.33 16.90 8.36
Smid-Cap Value (net) 1.03 5.32 1.30 32.07 11.38 15.93 7.43
Russell 2500 Value Index 1.86 5.34 2.42 25.20 8.22 15.04 6.94
Smid-Cap Value
Monthly Returns(%) as of 2/28/2017 Gross Net
1 Month 1.11 1.03
3 Months 5.54 5.32
YTD 1.45 1.30
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 40.61 39.45
3 Years 12.78 11.84
5 Years 15.98 15.00
10 Years 8.14 7.57
Russell 2500 Value Index
Monthly Returns(%) as of2/28/2017 Gross Net
1 Month 1.86 -
3 Months 5.34 -
YTD 2.42 -
Annualized Returns(%) as of 2/28/2017 Gross Net
1 Year 35.15 -
3 Years 8.32 -
5 Years 13.67 -
10 Years 6.99

Calendar Year Performance (%)

2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
Smid-Cap Value (Gross) 33.17 -4.65 11.61 34.47 14.57 1.71 22.34 24.80 -37.80 5.83
Smid-Cap Value (Net) 32.07 -5.46 10.67 33.37 13.60 0.84 21.30 23.77 -38.34 4.75
Russell 2500 Value Index 25.20 -5.49 9.88 33.32 19.21 -3.36 24.82 27.68 -31.99 -7.27
Smid-Cap Value
Year Gross Net
2016 33.17 32.07
2015 -4.65 -5.46
2014 11.61 10.67
2013 34.47 33.37
2012 14.57 13.60
2011 1.71 0.84
2010 22.34 21.30
2009 24.80 23.77
2008 -37.80 -38.34
2007 5.83 4.75
Russell 2500 Value Index
Year Gross Net
2016 25.20 -
2015 -5.49 -
2014 9.88 -
2013 33.32 -
2012 19.21 -
2011 -3.36 -
2010 24.82 -
2009 27.68 -
2008 -31.99 -
2007 -7.27 -

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 2500TM Value Index is an unmanaged index measuring the small- to mid-cap value segment of the U.S. equity universe that is constructed to provide a comprehensive and unbiased barometer of the small- to mid-cap value 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

The quarter was eventful to say the least as the market took a breather in October, then rallied hard following the surprising results of the U.S. presidential election and the Republicans’ sweep of the House and Senate. Investors seemed to quickly price in the pro-business policies of President-elect Trump, and the biggest winners in the small-cap and mid-cap universe were smaller, more volatile, and less-liquid stocks. Our strategy tends to participate less fully in more “risk-on” markets such as this due to our focus on dividend-paying, less volatile stocks with stronger fundamentals. However, we were able to offset these headwinds with strong stock selection and ended the quarter ahead of the benchmark.

Portfolio Commentary

For the quarter, the Denver Investments’ Smid-Cap Value portfolio outperformed the 9.34% return of its benchmark, the Russell 2500TM Value Index.

Contributors to Return

The portfolio’s solid performance was broad-based as it outperformed the benchmark in seven out of nine sectors for the quarter. The portfolio’s top-performing sectors relative to its benchmark were REITs, interest rate sensitive, and capital goods. Among the portfolio’s top contributors was Geo Group Inc., a prison REIT. Geo’s stock pulled back meaningfully in August as the market reacted negatively to a Washington Post article announcing the Justice Department’s plan to end the use of private prisons in Bureau of Prison contracts. After assessing the potential risks, and concluding that the market was being overly pessimistic, we added to the position. The stock rallied in November as the Republican sweep of the elections largely dispelled investor concern surrounding government use of private prisons. We trimmed the position on the recovery but continue to hold the stock as we still believe that expectations remain unduly punitive.  Reinsurance company Endurance Specialty Holdings Ltd. was another of the Fund’s top performers in the interest rate sensitive sector. It was acquired by Sompo Holdings, Inc., a large Japanese insurance company, for slightly higher than the intrinsic value we had estimated. We sold the position on the good news.

Detractors from Return

The energy, basic materials, and medical/healthcare sectors detracted from the portfolio’s performance relative to its benchmark for the quarter. More volatile stocks within the energy and basic materials sectors rallied following the elections on hopes that they would benefit from infrastructure spending, a more favorable regulatory environment, and the protectionist policies of the new administration. While the portfolio participated in this upswing, our focus on dividend-paying, less volatile stocks made it difficult to keep up with this rally of what we believe are more speculative stocks. The portfolio’s biggest detractor in the quarter was consumer sector holding Abercrombie & Fitch Co. There were a number of factors that weighed on the stock throughout the quarter, including news of continued unfavorable weather, a very late start to holiday shopping due to the extra weekend in the season, a resurging U.S. dollar, weak tourism, and weak overall apparel sales resulting in elevated promotional activity. Looking out longer term, we believe this is a turnaround story, particularly for the Abercrombie brand, and rarely do turnaround stories avoid setbacks. Energy holding EQT Corp. underperformed in the fourth quarter. EQT, along with many other gas producers, was faced with a worsening outlook for natural gas as more oil rigs have been put into production. This resulted in additional gas supply, which is a by-product of oil drilling. EQT continues to deliver peer-leading production growth at a very low cost, as well as solid midstream (gathering, processing, storing, and transporting) results. In addition, the company is investing in long-term opportunities by consolidating its lowest-cost Marcellus and Utica positions.

Outlook and Positioning

As we analyze what has taken place in the political world, we find ourselves with more questions than answers regarding economic outlooks and potential impacts on financial markets. The stock market has quickly priced in higher interest rates and faster economic growth for many sectors and individual stocks. However, we know from history and experience that policy changes take time and don’t always have the expected effect. We also know that, over time, stock prices have historically followed cash flow, not headlines or tweets. As such, we are working diligently to find stocks that have been left behind in this rally, but that we believe still have attractive opportunities to grow cash flow and improve returns. In addition, we have taken advantage of individual stock appreciation that we felt was too far ahead of fundamentals. We also note that investor uncertainty has accelerated, and uncertainty generally feeds volatility, which we believe can create opportunities for value-oriented long-term investors.



Stock Performance (3 months ended 12/31/2016)
Top 5 Stocks Average Weight Contribution to Return
GEO Group Inc 2.44% 1.30%
Endurance Specialty Holdings Ltd. 1.24 0.99
KeyCorp 1.69 0.76
Dean Foods Company 2.26 0.73
Hancock Holding Company 1.86 0.60
Bottom 5 Stocks Average Weight Contribution to Return
Abercrombie & Fitch Co. Class A 1.50% -0.36%
Goodyear Tire & Rubber Company 1.77 -0.13
Retail Properties of America, Inc. Class A 1.03 -0.12
EQT Corporation 0.92 -0.11
PVH Corp. 0.64 -0.11
Top 5 Stocks
GEO Group Inc
Average Weight 2.44%
Contribution to Return 1.30%
Endurance Specialty Holdings Ltd.
Average Weight 1.24
Contribution to Return 0.99
KeyCorp
Average Weight 1.69
Contribution to Return 0.76
Dean Foods Company
Average Weight 2.26
Contribution to Return 0.73
Hancock Holding Company
Average Weight 1.86
Contribution to Return 0.60
Bottom 5 Stocks
Abercrombie & Fitch Co. Class A
Average Weight 1.50%
Contribution to Return -0.36%
Goodyear Tire & Rubber Company
Average Weight 1.77
Contribution to Return -0.13
Retail Properties of America, Inc. Class A
Average Weight 1.03
Contribution to Return -0.12
EQT Corporation
Average Weight 0.92
Contribution to Return -0.11
PVH Corp.
Average Weight 0.64
Contribution to Return -0.11

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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