DENVER -- After a difficult three years in which its assets under management dropped 39%, Denver Investment Advisors LLC hopes to improve on its fortunes in 2001, even as its chief investment officer retires.
The independent Denver-based firm has shed assets steadily during the past three years, dropping to $6.8 billion at the end of 2000, from $8.4 billion in 1999 and $10.9 billion in 1998. The firm peaked at $11.1 billion at year-end 1997, after a seven-year runup in which its asset under management grew by $8 billion. As of year-end 2000, the firm managed $5.8 billion in institutional assets.
DIA has been fighting the slump by adding to its investment menu and sticking to its style guns.
And more change is in the offing. At the end of 2001, CIO Ken Penland will retire after 35 years with the firm. A successor has not yet been named.
Consultants say much of the decline can be attributed to the struggles of the firm's flagship portfolio, a midcap growth strategy that had $3.3 billion in assets at the end of 2000. It had dropped from $4.5 billion at the end of 1999 and $7 billion at the end of 1998, according to Pensions & Investments' Performance Evaluation Report data.
The portfolio, managed by Todger Anderson, returned -16.1% in 2000, underperforming the Russell Midcap Growth index by 4.3 percentage points.
Jeff Adams, chief operating officer, said the drop in assets of the firm's largest portfolio in 2000 was due to market conditions and not client defections. Just one client terminated its mandate last year, the $33 billion Public Employees Retirement Association of Colorado, Denver.
The year that really hurt the portfolio was 1999, said Mr. Adams.
A `restrained' strategy
The midcap growth strategy returned 61.1% in 1999 according to PIPER, which apparently wasn't good enough in a high-flying year for equities. The return placed the fund in the fourth decile in its peer group, according to PIPER.
"The portfolio has a somewhat restrained strategy," said Michael Gaul, analyst at Morningstar Inc., Chicago. "It's not going to load up on a lot of higher-priced fare."
That year, sticking to its style hurt the firm.
In the third quarter of 1999, the midcap portfolio lost some big clients. "We didn't fully participate in the theme-based market that ended in March of this past year," said Mr. Adams. "The managers that were purely story-based or theme-based had huge numbers. We clenched our fists and said research will win out in the end. We believe the market has shifted away from story-based investing and back to a research-based market."
The firm will maintain that research-driven focus, he said, even after Mr. Penland retires. "He set this firm up to succeed by making sure the people that are left behind are research-focused also," said Mr. Adams.
The midcap growth portfolio, established in 1958, posted annualized returns of 15.2% for the three years ended Dec. 31, 16% for five years, and 19.3% for 10 years. In contrast, the Russell Midcap Growth index returned 16.3%, 17.8% and 18.1%, respectively, for those time periods.
After the market came crashing down, the midcap growth portfolio outperformed its benchmark in the second and third quarters of 2000.
DIA also lost assets in its small-cap value portfolio in 2000. Several pension funds, including the $375 million New Orleans City Employees' Retirement System; $10.2 billion Hawaii Employees' Retirement System; and the $170 million El Paso County Retirement Plan, Colorado Springs, Colo., terminated the portfolio, citing manager turnover.
Jerome Davis, chairman of the New Orleans fund, said three factors played into the board's June decision to terminate DIA: manager turnover; poor market conditions for small-cap value; and the pension fund's desire to move in another direction to boost returns.
"We felt they were a superior firm, but due to some unfortunate personnel changes and the status of the small-cap value market, the board decided not to wait the full three years," he said.
The portfolio had three managers in 2000: Varilyn Schock, who retired in January after managing the portfolio for nine years; Timothy Quinlisk, who was hired to replace Ms. Schock; and Christianna Wood.
Ms. Wood took over the portfolio in March and piloted it to a 22% return for the year, outperforming its benchmark, the Russell 2000, which returned -3% in 2000. However, it slightly underperformed the 22.8% return of the Russell 2000 Small-cap Value index.
Considering the year-end return of the portfolio, one consultant said clients might have been too quick to pull the trigger. Richard Dahab, president of Dahab Consulting, Bay Shore, N.Y., said the firm has struggled in recent years because of an unpredictable market and turnover in the small-cap value area.
However, he has seen firms in worse shape. "Is the organization in turmoil? No, we don't believe it is," he said.
Denver Investment has established international equity investing capabilities. The firm hired Michael Gerding to run the international small-cap growth portfolio it launched in 1999 and the International Select Fund, a concentrated growth equity fund, it launched in 2000. Mr. Gerding joined DIA from Founders Asset Management, Denver, where he ran the Founders Passport Fund and the Founders Worldwide Growth Fund.
In addition, in May the firm acquired Bee & Associates, a Denver-based firm that specializes in international small-cap equity investing. With the acquisition, which brought $280 million in assets, DIA added Bee's small-cap value portfolio, managed by Adam Schor, to its roster.
DIA now manages $350 million in international assets.