Money Managers and Companies Swoon Over San Diego - TheStreet

Money Managers and Companies Swoon Over San Diego

The 'finest city' is seeing venture capital and financial firms flock to its borders.
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SAN DIEGO - Sitting in front of a wall of flat panel monitors,


analyst Randy Hanley is looking for growth stocks that have relative strength against the market. Behind his desk, which overlooks the sunny La Jolla, Calif., skyline, sits a row of S-1 filings -- private companies that are not quite ready for prime time but oozing with potential.

"We like



. We want to be there," says Hanley to his

Goldman Sachs

broker who's on speed dial just before the Internet play goes public. "And we're hearing it's very hot." The stock, which had an offering price of 16, closed at 29 1/8 on its first day, sending the company's market capitalization to more than $3 billion.

Hanley is just one of a growing base of young money managers, venture capitalists and companies that are calling San Diego home. As of June 1999, 183 securities brokers and dealers worked in the city, up threefold since 1992, according to the economic research bureau of the

San Diego Chamber of Commerce

. Digital wireless highflier


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started here as a small-cap in 1991. More recently,



and agribusiness and health-care operator



have launched in the city as well.

Of course, San Diego isn't quite ready to challenge Silicon Valley for venture capital funding, but 26 companies based here received $178 million in funding in the second quarter of 1999 alone, says Sarah Davis, information manager at the

San Diego Economic Development Corp.

San Diego, it seems, may be living up to its not-so-modest motto of "America's Finest City."

To watch the markets, financial honchos here have to wake at 4:30 a.m. But Wall Street is increasingly coming to this fledgling financial community to curry favor. Small-cap company hotshots, with their incredible earnings momentum and strong money flows, are meeting more frequently with San Diego's booming money management community. A handful of the fastest-growing, momentum-driven firms in America -- Duncan-Hurst (nearly $4 billion in assets, up from $2.7 billion in 1997),

Nicholas Applegate

($27 billion in assets) and

Brandes Investments

($25 billion in assets in 1998, up from $16 billion in 1997), among others, call the city home.

The reason all this money is flowing through the city's veins is simple: Money managers here seek stocks with growth and a positive momentum bias, and "that's been a pretty successful form of investing this decade," says Ken McCain, co-founder of

Wall Street Associates

, whose assets have grown from $1.1 billion at the start of the year to almost $1.5 billion now. "I've never seen

Jay Leno


The Tonight Show

since I've been here, but I can't complain," says McCain, who lives a block from the beach and has resided in the city for almost two decades.

William "Beau" Duncan, who founded Duncan-Hurst in San Diego in 1990, says the city's premier-player status in the hot small-cap momentum niche accounts for the rise in money managing. "We have brought all that activity with brokers from San Francisco and Los Angeles to San Diego, where we have the elements of a big city with good family living." In just the past month, two San Francisco-based hedge funds have made the move:

Meisenbach Capital

, with $125 million in assets, and

Hermes Advisors

, with $200 million. "I expect to see slightly more deal-oriented flow than in San Francisco," says Hermes' president Paul Flather.

All this means is that what once was a "maybe" destination for company roadshows is today a definite yes. Says Duncan: "The roadshows were all in Los Angeles when I started down here. Now they are all here and in San Francisco."

"There is a lot of money interested in companies like us there," says one Internet infrastructure executive whose company is about to go public. "And you can't miss San Diego now. In fact, it's where a lot of us start," a sentiment echoed by Kevin Leslie, a research assistant at the economic research bureau.

This is particularly significant for hot IPOs because the float, or the shares outstanding not owned by insiders, is usually so minuscule that by the end of a hot roadshow, it's often hard to get a big position, says Tom Bleakley, a portfolio manager of the emerging growth and mini-cap funds for Nicholas Applegate, which is headquartered in downtown San Diego.

Of course, these money management firms don't buy into just IPOs. Duncan-Hurst has almost $4 billion in assets under management and the company's IPO returns make up one-hundredth of its daily returns, according to Hanley. For example, Duncan-Hurst recently bought up 27,000 shares of

Broadbase Software


at the 14 offering price, and even after the stock's doubling, the return made up just 0.02% of the 2.02% return for its small-cap fund for the day, he explains. Duncan's blend of momentum investing and earnings momentum, it seems, is working: The two institutional funds Hanley does research for -- the small-cap and mid-cap funds -- are up more than 40% year-to-date. In comparison, the

Russell Small-Cap Index

is up 0.4% year-to-date and the S&P 500 Index has risen 4.4%.

Companies move to the city to get with the vibe. "Early last year, it was just me, Ted

Waitt and David

Robino," says Gateway president and COO Jeff Weitzen, who opened the new office in San Diego last June with CEO Waitt and Robino, Gateway's chief administrative officer. "We are very much in the California deal flow here," says Weitzen, whose naturally lit offices rest up against

Sun Microsystems'

(SUNW) - Get Report

in La Jolla. Recruiting is a lot easier here than in the company's former headquarters in North Sioux City, S.D., where 350 jobs remained vacant for over a year. Says Weitzen, "San Diego truly is America's finest city."

And we thought it was just the motto.