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:

$1,000,000

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

Performance (%)

  Monthly Returns (%)
Periods Ended: 12/31/2017
Annualized Returns (%)
Periods Ended: 12/31/2017
1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years
Smid-Cap Value (gross) 0.15 2.27 2.59 2.59 9.21 14.35 8.02
Smid-Cap Value (net) 0.08 2.06 1.72 1.72 8.29 13.39 7.11
Russell 2500 Value Index 0.4 4.25 10.36 10.36 9.3 13.27 8.82
Smid-Cap Value
Monthly Returns(%) as of 12/31/2017 Gross Net
1 Month 0.15 0.08
3 Months 2.27 2.06
YTD 2.59 1.72
Annualized Returns(%) as of 12/31/2017 Gross Net
1 Year 2.59 1.72
3 Years 9.21 8.29
5 Years 14.35 13.39
10 Years 8.02 7.11
Russell 2500 Value Index
Monthly Returns(%) as of12/31/2017 Gross Net
1 Month 0.4 -
3 Months 4.25 -
YTD 10.36 -
Annualized Returns(%) as of 12/31/2017 Gross Net
1 Year 10.36 -
3 Years 9.3 -
5 Years 13.27 -
10 Years 8.82

Calendar Year Performance (%)

2017 2016 2015 2014 2013 2012 2011 2010 2009 2008
Smid-Cap Value (Gross) 2.59 33.17 -4.65 11.61 34.47 14.57 1.71 22.34 24.80 -37.80
Smid-Cap Value (Net) 1.72 32.07 -5.46 10.67 33.37 13.60 0.84 21.30 23.77 -38.34
Russell 2500 Value Index 10.36 25.20 -5.49 7.11 33.32 19.21 -3.36 24.82 27.68 -31.99
Smid-Cap Value
Year Gross Net
2017 2.59 1.72
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
Russell 2500 Value Index
Year Gross Net
2017 10.36 -
2016 25.20 -
2015 -5.49 -
2014 7.11 -
2013 33.32 -
2012 19.21 -
2011 -3.36 -
2010 24.82 -
2009 27.68 -
2008 -31.99 -

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 12/31/2017

 

Market Overview

Markets climbed higher in the fourth quarter based on the passage of the tax bill and hopes that lower corporate and individual tax rates would accelerate economic growth. Value stocks underperformed growth stocks and small-cap and mid-cap stocks underperformed large-cap stocks, as was the case throughout the year, as valuation remained out of favor and the momentum-driven market continued. Investors focused on stocks that had the highest sales growth and best fundamental execution, regardless of valuation levels. In this environment, it was not surprising that dividend-paying and less volatile stocks underperformed.

Contributors to Return

The sectors that contributed most to the portfolio’s return relative to its benchmark in the quarter were basic materials, utilities, and consumer. The portfolio’s top performer for the quarter and top performer in the consumer sector was Sinclair Broadcasting Group Inc. This diversified television broadcaster experienced share price appreciation after the Federal Communications Commission took steps toward deregulating the broadcasting industry. An increase or elimination of the media ownership cap would allow Sinclair to combine with Tribune Media and divest fewer TV stations as a result. In addition, the stock reacted favorably to the passing of tax reform, as a lower cash tax rate should drive free cash flow higher for Sinclair and other cash-tax paying Broadcasting companies. WestLake Chemical Corp., a vertically integrated global manufacturer and marketer of basic chemicals, vinyls, polymers, and building products, outperformed in the fourth quarter. The market came to appreciate its ethylene positions and the reduced cyclicality of the company’s profit margin profile. Moreover, fears of a North American ethylene oversupply proved to be overblown due to delays in supply additions and Hurricane Harvey’s impact on competitor ethylene output. Also, WestLakes’s vinyls business continued to see strong pricing momentum as North American competitors suffered maintenance downtime, Chinese production capacity was halted due to increasing environmental actions, and capacity for European production of mercury cells, used in vinyl production, was permanently capped. Voya Financial Inc., a diversified financial services company, was the standout performer within the interest rate sensitive sector as the company announced the sale of its closed book variable annuity business. This action should reduce the company’s market and insurance risk. Additionally, it will allow Voya to focus on its higher-growth, higher-margin, and lower capital businesses, which include retirement, investment management, and employee benefits. Shares of Texas oil and gas exploration and production company SM Energy Co. performed well in the fourth quarter. Oil prices moved up due to strong global demand, international outages, reasonable U.S. shale production growth, and a November quota extension by OPEC. Further contributing to the portfolio’s performance was Lamb Weston Holdings Inc., a producer and marketer of frozen potato products. The company reported solid first quarter sales and earnings driven by increased prices and improved product mix. News of positive contract renewals and early indications of an average potato crop year added to the tailwinds for the stock.

Detractors from Return

The portfolio’s weakest sectors relative to its benchmark for the quarter were REITs, technology, and energy. From an individual stock perspective, portfolio holding CBL & Associates Properties, Inc., a mall developer and operator focused in the southeast, was the largest detractor from performance. The stock pulled back meaningfully following the company’s disappointing third quarter earnings announcement in which the dividend was cut by 25%. We were surprised by the magnitude of deterioration in the price of rent per square foot for new leases compared to previous rates. Increased uncertainty about the business, along with the decreased dividend, that emphasized management’s growing concern, led us to exit the position. TiVo Corp., a provider of entertainment technology and software offerings, also detracted from Fu portfolio nd performance. The stock struggled as a ruling in an intellectual property complaint filed by TiVo was delayed until late November. While certain intellectual property infringement was ultimately confirmed in December, the company charged with infringement has issued notice of appeal. We believe these issues will be resolved in the coming months. AmTrust Financial Services Inc., an insurer focused on small businesses in lower risk industries, was also among the portfolio’s largest detractors during the quarter. The stock pulled back on lower-than-expected earnings that resulted from record-high catastrophe losses due to the severe hurricane season. In addition, the stock has been volatile while management repositions the company through a partial sale of the fee business and the strengthening of reserves and capital raises. We believe these actions position the company well to accelerate growth and improve returns in the coming quarters. Travelport Worldwide Ltd., a provider of global distribution systems for the travel industry, underperformed despite quarterly reporting that was in line with expectations. Investors were anticipating an increase to fourth quarter guidance for earnings estimates driven by new business contract wins, but management indicated that costs related to the launch of these new customers has been offsetting profitability in the near term. We believe Travelport is well positioned to benefit from continued growth in global travel and the emerging middle class in India and Asia. Realogy Holdings Corp., a leading owner and franchisor of residential real estate brokerages, as well as corporate relocation and title insurance, was another disappointing performer in the quarter. The company reported lower-than-expected earnings and reduced its guidance for future earnings estimates due to higher costs. The stock also pulled back on market concerns regarding the impact of tax reform on the sale of higher priced homes in high tax states. We see a very favorable outlook for housing and a significantly lower tax rate for Realogy as significant tailwinds to sales and cash flow growth going forward.

Outlook and Positioning

With the passing of tax reform, markets finally have a reason to believe that economic growth will accelerate. Such growth is necessary to support historically high equity valuation levels and fuel further stock price appreciation. The question remains whether tax reform will drive capital expenditures and consumer spending high enough to offset wage pressure and other inflation drivers. This could allow the Fed to normalize policy rates and accelerate the shrinkage of its balance sheet, thereby putting a damper on the economy’s growth rate. An accelerating economy is typically more beneficial to economically-sensitive, domestic-focused, and smaller-cap stocks, and tax reform should positively impact higher tax sectors, such as financials, consumer discretionary, and capital goods. We believe our strategy is well-positioned in this type of environment and we are working hard to improve our stock selection and bounce back, as we have in the past, from a tough year of performance.



Stock Performance (3 months ended 12/31/2017)
Top 5 Stocks Average Weight Contribution to Return
Sinclair Broadcast Group, Inc. Class A 2.26% 0.42%
Westlake Chemical Corporation 1.45 0.38
Voya Financial, Inc. 1.68 0.38
Lamb Weston Holdings, Inc. 1.86 0.35
SM Energy Company 1.65 0.35
Bottom 5 Stocks Average Weight Contribution to Return
CBL & Associates Properties, Inc. 1.01% -0.62%
TiVo Corp. 2.09 -0.50
AmTrust Financial Services Inc. 1.45 -0.44
Travelport Worldwide Ltd. 1.62 -0.30
Realogy Holdings Corp. 1.40 -0.30
Top 5 Stocks
Sinclair Broadcast Group, Inc. Class A
Average Weight 2.26%
Contribution to Return 0.42%
Westlake Chemical Corporation
Average Weight 1.45
Contribution to Return 0.38
Voya Financial, Inc.
Average Weight 1.68
Contribution to Return 0.38
Lamb Weston Holdings, Inc.
Average Weight 1.86
Contribution to Return 0.35
SM Energy Company
Average Weight 1.65
Contribution to Return 0.35
Bottom 5 Stocks
CBL & Associates Properties, Inc.
Average Weight 1.01%
Contribution to Return -0.62%
TiVo Corp.
Average Weight 2.09
Contribution to Return -0.50
AmTrust Financial Services Inc.
Average Weight 1.45
Contribution to Return -0.44
Travelport Worldwide Ltd.
Average Weight 1.62
Contribution to Return -0.30
Realogy Holdings Corp.
Average Weight 1.40
Contribution to Return -0.30

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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