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Jan 31, 1999

Spotlight on Denver

Look high up to find a group of bottom-up investors

One word: growth. It's the word-of-the-day, the theme, the mantra of Denver. First, in terms of population. Since 1990, more than 395,000 people have moved to Colorado's 'front range' ­ Denver, Colorado Springs and Boulder, all nestled in the eastern foothills of the Rockies. Next, equities under management: Denver more than doubled its total in five years to $127.4 bn in 1997. And finally, there is no mistaking Denver's investment style. Say it with me: growth.

'Clearly growth,' says the Berger Funds' Patrick Adams. 'Pretty growth-oriented,' adds William Bales of Janus. 'If you could only pick one style, you would say it's a growth town,' concludes Kenneth Penland, chairman of Denver Investment Advisors. 'It's a 'growth stop', and if there's a roadshow for a growth-oriented company, they're going to want Denver on the circuit,' he adds.

Indeed, still working alongside east and west coast refugees chasing John Denver's dream of a 'Rocky Mountain high' are true pioneers of bottom-up, growth stock investing. Take Tom Bailey, who in 1969 founded Janus, a fund management business that has grown from $2.2 bn under management in 1990 to over $90 bn today ­ all on the strength of fundamental analysis. Or Bill Berger, whose eponymous funds group has made him synonymous with Denver's stock-picking style.

These stock pickers have also helped differentiate Denver as a buy-side town. Few regional sell-side firms are headquartered here. They include the small Hanisen Imhoff and Neideger Tucker Bruner, Dain Rauscher from Minneapolis has an outpost, as do Kansas City's George K Baum, AG Edwards from St Louis and Chicago's Everen Securities. Of the big wire houses, Merrill Lynch and Salomon Smith Barney have sizeable retail brokerage teams here. The dearth of sell-side analysts may help explain the emphasis on in-house research marking most Denver fund management institutions.


Aggressive results

Patrick Adams, a portfolio manager for the Berger Funds, has often been asked about the origins of the Denver growth investing phenomenon. A midwesterner by birth, he points to Cincinnati where three dominant, old-line banks were the money managers. 'But in Denver there isn't a single large independent bank. So what popped up were Tom Bailey at Janus, Bill Berger at Berger, Erik Borgen at Founders ­ smaller players who were aggressive, and the only way they could make money without the trust company infrastructure was to produce good results.'

'A lot of these fund managers were here 20 years ago, during the go-go years of the penny stock boom,' points out Carl Thompson, CEO of IR consultant Carl Thompson Associates in nearby Boulder, Colorado. 'They learned a lot of valuable lessons from those turbulent years, and they're much smarter because of that. I watched the guys at Janus and Berger playing those small oil stocks in the 1970s and 1980s; now I see them playing Microsoft and Dell Computer. They're a lot savvier because of those battle scars.' Kenneth Penland, chairman of Denver Investment Advisors, has a much simpler explanation for Denver's growth bent: 'It works,' he says.

Denver has extended its mandate as its hometown institutions have grown. Kenneth James, president of Greenwood Investment Management and president of the Denver Society of Security Analysts, suggests that in the last five years Denver's style has broadened out along with an increase in the number of investment advisors. 'It's now a diverse community,' he says. 'As the growth managers grew bigger they diversified to other styles, and continued to grow in the second wave of large cap and value investing.'

James notes that the Denver analyst society has grown from around 250 to 400 members in the past five years. This is partly because of the expansion of local shops and an influx of new players like Great West Life, a bond investor that moved down from Canada in search of more pleasant climes to work in.

'It's a great place to live and work, so it attracts a lot of smart people,' says Penland. 'The money management business is an international business that can be conducted from just about anywhere. And because it's very people intensive, it divides and multiplies.' Adds William Bales, co-portfolio manager of Janus Venture Fund, 'The weather's great, so there's a tremendous opportunity to be outdoors. It's just a good quality of life. I expect to see more shops open up offices in Denver.'

'Most people think it snows all the time, but it's a mild climate an hour-and-a-half from skiing. And it's generally more casual,' adds Berger's Adams, who, on this Friday, is clad in a sweatshirt: 'You think better without a tie on.'

Still, don't let Denver's ski-bum ethos fool you. 'A surprisingly large percentage of fund managers and analysts here are actually refugees from other financial centers such as Los Angeles or New York,' says Carl Thompson. 'Tired of fighting traffic and crime, they moved here for a better quality of life. They bring a high degree of sophistication and understanding of the markets, and they resent the attitude that investing acumen drops precipitously west of the Hudson River. The fund managers here are among the brightest in the country.'

He adds that Denver investors are not 'laid back' in the usual sense. When they've finished a 50-hour week, they're ready to charge up the slopes and hit the moguls, or do marathons at 12,000 feet. 'They work hard and play hard. But they will take a little more time with you, and are more apt to have a meeting in an open collar or sweater than in Wall Street uniform. They also have the ability to do business on the slopes, against the unique backdrop of Vail or Aspen.'

'You attract more bees with honey than you do with a stick,' explains Adams. 'There's a stick mentality used by New York fund managers ­ try and beat the company up to get the information. But you can get as good or better information by being cordial, and having the company view you as a partner, not a customer.'


Frequent flyers

'We love it when companies come to us,' remarks Penland. 'But our analysts also have an unlimited budget for travel research. If somebody needs to go somewhere to visit a company, maybe a competitor or a supplier of a company we're seriously interested in investing in, they do it. I shudder to think of the frequent flyer miles they're racking up.'

'Like Janus, we go out on the road, visiting our companies in order to ensure we get an information edge,' says Berger's Adams. 'How we're unique is that we're smaller, and that means we're more nimble too. One group of our portfolio managers focuses on small stocks, the other group on mid and large cap stocks. If we have an idea, then boom, we're on a plane visiting the company right away or we're on the phone direct with the chief executive. Decisions are made very quickly here.'

Adams says that if there's a particular issue with a company, he likes to talk to the person in charge of the line of business in question. Berger may also survey the company's own customers ­ 'to make sure we really get the right picture.'

He adds that it's unfortunate many companies don't open the door and let him run free. 'A lot of the time the IRO is the liaison, and often they don't have the best information. An exception is Consolidated Stores. The IRO there is top-notch, part of strategic planning. I flew out to Ohio, he took me into the warehouse, and I watched it operate to see how the inventory makes it to the stores. When it's possible we like to go straight to the gut of the issue when we go see the companies. Otherwise we could just call the company and chat.'

Adams describes Berger's style as growth at a reasonable price. 'But how we do it is different. We like to buy really high quality companies with fast, sustainable growth. Most Garp guys buy value stocks. Not us. We look for fast growing companies, but we're not willing to overpay in terms of true earnings growth.'


Fundamentalist stronghold

Janus's Bales remarks that 'fundamental research' is an overused phrase: 'Everybody wants to say they do it.' He considers his own firm an exception. 'We're encouraged to go out and visit our companies once or twice a year, see them at conferences, making sure we've got our finger on the pulse. We do whatever it takes: talk to people on planes, call customers, visit suppliers.'

Recently Bales visited Silicon Valley to meet with five companies, including two cable modem companies where he talked to the engineering heads. 'They're not used to answering Wall Street questions, but they know the technology. The fund management business is so competitive, you have to get behind the front line. For us to have an edge, we've got to make those contacts.'

Still, IROs need not wait at home for Denver analysts to descend on them and a great many companies now come through Denver. 'I hear that fund managers are encouraged not to leave the office because of the inflow of people coming to see them,' says Bales.

Indeed, during any given week, three to ten companies visit Janus's premises. And Bales says he takes in 100-200 roadshows a year. The Denver Society of Security Analysts can also make for a good IR venue. Each year ten or twelve companies present at meetings held between September and June, either at the Metropolitan Club in the southern part of the city or the Denver Country Club in the north. Last year Atlas Air, Radioshack and Motorola were included on the roster.

When visiting Denver, IROs should plan on visiting the downtown as well as the 'Tech Center' to the south, where Invesco is located. In between, in the Cherry Creek area, are Berger, Janus, Founders Asset Management and Montgomery Asset Management.

Company managements should also keep in mind how research-driven these institutions are. Denver Investment Advisors, for instance, is unlike most shops where a research department feeds ideas to portfolio managers. Here the analysts are not only very experienced, they're also the decision makers. 'Our analysts really have responsibility to manage money and make the decisions.' So a DIA analyst is like a portfolio manager wearing an industry-specific hat, and IROs may want to prepare a more detailed presentation than they would for a more generalist portfolio manager.

'We're in the business of forecasting the future,' comments DIA's Penland. 'Our analysts ultimately need to get down to the level of building their own earnings forecasts and models for the companies in our portfolios.'

Denver portfolio managers are clearly tough customers when it comes to selling them on an investment proposition. Nonetheless, this is a prime stop for any roadshow. 'If you want to get your stock purchased, this is a great place to start,' says Berger's Adams. 'It's a very active community and very open to ideas.'

Adams explains that while New York fund managers have a 'definite group-think mentality, Denver firms are more independent thinking.' So any company with an unsung growth story, whether a hot start-up or an established company entering a growth phase, should definitely put this Rocky Mountain haven on their itinerary.