Throughout the month of April, AdvisorOne will focus on separately managed accounts: the money manager options advisors have, the platforms through which they can gain access to those managers, how they can conduct due diligence on those managers, and how advisors are using SMAs in client portfolios.
We begin our coverage by presenting the Investment Advisor-Prima Capital seventh annual Separately Managed Account Managers of the Year. In a feature article in the April 2011 issue of Investment Advisor, seven managers in six different asset classes were chosen as "A Class Apart."
(See the complete calendar of our Special Report for past and upcoming coverage.)
In this article, we focus on Denver-based Denver Investment Advisors Concentrated Mid-Cap Growth Strategy, winners in the mid-cap equity space.
The philosophy: Equity prices reflect expectations for earnings and cash flow, and that consistently anticipating changes in expectations is the key to achieving the strategy’s goal of long-term outperformance.
The portfolio: A focus on the ‘best ideas’ of Denver’s mid-cap growth team, using quantitative screening and independent fundamental research to invest in the 25-30 mid- and smid-cap growth companies in which the team has the highest conviction. Target is to include less than 5% of portfolio in cash.
The performance: 2010 performance (company supplied).
Strategy return (gross): 32.12%
Strategy return (net): 31.09%
Russell Midcap Growth Index: 26.38%
S&P 500: 15.06%
Total AUM (12/31/10): $9.005 billion (See firm’s Form ADV.)
The people: Investment Advisor Editor John Sullivan spoke in March with Mitch Begun, CFA, partner co-director of Mid-Cap Growth Research, and portfolio manager. Team members include William Chester, CFA, also a partner, co-director of Mid-Cap Growth Research and portfolio manager
Mid-Cap Equity Award
Denver Investment Advisors
Concentrated Mid-Cap Growth Strategy
Denver Investment Advisors has a process that works, and they’re sticking with it.
The (surprise) Denver-based firm was founded in 1958, with the separately managed account team put in place in 1998.
The firm has a long history of real dedication to investment research and to being early with new opportunities,” says Mitch Begun, partner and co-director of mid-cap growth research. “The Concentrated Mid-Cap Growth strategy was designed as a best-ideas, high-conviction product.”
Begun says the mid-cap asset class is extremely attractive, and the firm’s sweet spot is companies with between $1 billion and $10 billion in market cap. They are a little more developed than their small-cap brethren, he says, but still more flexible and with more opportunity for growth than large-cap stocks.
“We generate alpha from our stock selection,” Begun explains. “We look for a nice balance of
growth, value and quality characteristics. We also look for companies that are either market leaders or can gain market share. From a secular standpoint, we look for dynamic growth in an industry; from the more cyclical industries, we look for an inflection point in which to enter. Overall, we have company-specific drivers, rather than top-down drivers.”
A key differentiator for the firm, he says, is that it focuses on risk management and a strict sell discipline. The latter is something not enough managers focus on, according to Begun.
“Our risk screen helps us identify characteristics that lead to underperformance. And we don’t want to overpay for our stocks. We sell when the market recognizes what we recognize. We have to be very disciplined about this because when you make mistakes in the growth space, they tend to be more violent, so we focus on delta.”
When looking to buy, the team looks to see if the overall industry is growing, if the company is gaining market share, if margins are expanding and if the valuation if attractive. When looking to sell, naturally the signals are the opposite: a slowing industry, losing market share, compressed margins and valuations that are simply too expensive.
The firm names health care company Varian Medical Systems by way of example of a company they like. The x-ray and diagnostic provider is a leader in its space and recently released a new product, TrueBeam. The new product is gaining market share in radiation oncology and diagnostics, and is expanding, in particular, in economies where wages and quality of life are increasing.
Begun notes that the firm is structured as to avoid the echo chamber by assigning managers to sectors rather than entire industries.
“For instance, we have one manager dedicated to technology hardware,” he says, “and another to technology software. In this way it helps in the collaborative process.”