A fund manager who’s crushing nearly all of her peers breaks down 3 under-the radar stocks driving her strong performance

Portfolio manager Amy Zhang, CFA, spoke with Business Insider

A fund manager who’s crushing nearly all of her peers breaks down 3 under-the radar stocks driving her strong performance Akin Oyedele Sep. 16, 2018, 12:51 AM

Amy Zhang § The Alger Small Cap Focus Fund, managed by Amy Zhang, has gained 47% this year, outperforming its benchmark and all except one US fund tracked by Morningstar . § Small-cap stocks, broadly defined as companies worth $200 million to $2 billion, provide a "fertile ground for active management," she told Business Insider. § In a recent interview, Zhang shared three stock picks that had helped drive her fund's outperformance as well as what mattered most when deciding which companies to invest in.

There's hardly any obvious link between playing the piano and investing. But Amy Zhang, who does both activities, can spot a few, including the importance of consistency, creativity, and practice. She also recalls the looming deadlines before each time her teacher would show up to evaluate what was learned during the previous lesson. "It forced me to be disciplined," Zhang said of her piano-learning days. She said those skills had carried over into her management of the $2.2 billion Alger Small Cap Focus Fund . As of Wednesday, the fund's 47% year-to-date gain was outranked by just one US portfolio in Morningstar's coverage universe. It also beat the best-performing large-cap growth funds, mirroring how smaller companies have gained more than their larger counterparts this year; the Russell 2,000 has rallied 11.5%, outperforming the S&P 500 by about 3.5 percentage points. The small-cap space is "a fertile ground for active management," Zhang told Business Insider in an interview on Tuesday. For one, there are nearly nine times as many US small caps (worth $200 million to $2 billion) as there are mega-cap companies worth more than $50 billion. This means there are far fewer analysts available to cover small-cap companies, the stocks are less liquid, and institutional ownership is less. This inefficiency means stock pickers who do the grunt work may find outsize opportunities that have fewer eyeballs. "People ask me if I'm surprised by the performance, and I don't want to sound arrogant, but I think it's a testament to long-term stock-picking investors like us," Zhang said. Though market cap is widely used to separate small caps from mega caps, Zhang prefers to use revenue to define company sizes — specifically those with no more than $500 million in revenue as a starting point.

It's all about data From there, companies she finds attractive tend to have one thing in common: their ability to turn

data into actionable information. Veeva Systems fit that profile.

It's essentially a tech company for the healthcare industry, providing content-management software. Pharma and biotech companies, for example, can use Veeva's cloud-based software to scan documents securely from mobile phones or track data during a clinical trial. Veeva's clients include Merck and Biogen. The company had $512 million in cash at the end of the second quarter and earned $209.6 million in revenue. Though Veeva is firmly in the life-sciences arena, it also creates software for companies in the consumer-goods and chemical industries.

"There's still lots of room for growth," Zhang said, notwithstanding the stock's 88% surge this year and 135% gain since it went public in 2013. "We always invest in companies that have long-term secular trends," Zhang said, including another tech company called Cognex . Zhang describes it as making "machines that can act like the human eye and the human brain, which is not easy." Cognex's machine-vision products span from barcode readers to laser cutters and Zhang's self- professed favorite: inspecting pizzas to ensure they're adequately covered with cheese . "It's more precise," she said, and taps into the longer-term trend of human tasks being reassigned to machines that can do them more efficiently. What also makes Cognex attractive is that its core technologies can be applied — and are already being used — in various industries, which gives the company longevity, Zhang said. The company's total addressable market is north of $3.5 billion, she said. A common thread that runs through these companies is that they have a healthy spend on research and development as a share of revenue. For Zhang, it's a demonstration that they are investing in the future. Cognex spent $27 million, or 13% of its revenue, on R&D during the second quarter. It reported $755 million in cash and investments and no debt. Another characteristic Zhang looks for when picking stocks is companies that address a pain point for customers. That's partly why Apptio was a buy, and it remains a top-10 holding in her portfolio. Apptio uses companies' IT data combined with details of their finances to budget and plan their technology needs. The company started with enterprises but is now gaining federal clients including Washington state. "That's opened up a whole new addressable market," she said, adding that these tended to be sticky long-term contracts that are expensive to cancel. Apptio is also net cash positive, with $255 million in cash and $143 million in debt at the end of the second quarter. Its stock has surged 72% in 2018.

This article reprint, originally published by Business Insider on September 13, 2018, is considered sales literature only for the Alger funds mentioned and not for any other products shown. Please note that Business Insider is an independent publication and the performance and ratings cited in the article do not represent the experience of any individual investor. Alger Small Cap Focus Fund - Average Annual Total Returns (%) (as of 9/30/18) 1 Year 3 Years 5 Years Since Inception Class Z (Incepted 12/29/10) 51.81 28.29 17.57 16.15

Russell 2000 Growth Index





1% 11/702

1% 6/606

2% 8/532

Morningstar Percentile Rank (Small Growth) Based on Total Returns

TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/18) 0.90%

Only periods greater than 12 months are annualized. Prior to 8/07/15, the Fund followed different investment strategies under the name “Alger Growth Opportunities Fund” and prior to 2/12/15 was managed by a different port- folio manager. Accordingly, performance prior to those dates does not reflect the Fund’s current investment strategies and investment personnel. Effective 8/07/15, the Fund’s primary benchmark is the Russell 2000 Growth Index. Class Z shares are available to certain investors with an initial investment minimum of $500,000. Please consult the prospectus for more information. The performance data quoted represents past performance, which is not an indication or a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Performance figures assume all distributions are reinvested. For performance current to the most recent month end, visit www.alger.com or call 800.992.3863. Risk Disclosures: IInvesting in the stock market involves gains and losses and may not be suitable for all investors. The value of an investment may move up or down, sometimes rapidly and unpredictably, and may be worth more or less than what you invested. Stocks tend to be more volatile than other investments such as bonds. Growth stocks tend to be more volatile than other stocks as the prices of growth stocks tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Investing in companies of small capitalizations involve the risk that such issuers may have limited product lines or financial resources, lack management depth, or have more limited liquidity. The Fund may have a more concentrated portfolio than other funds, so it may be more vulnerable to changes in the market value of a single issuer and may be more susceptible to risks associated with a single economic, political or regulatory occurrence than a fund that has a more diversi- fied portfolio. Since the Fund concentrates its investments in the health sciences sector, the value of the Fund’s shares may be more volatile than those that do not similarly concentrate their investments. Changes in applicable regulations could adversely affect companies in these industries, and the pace of product development and technologi- cal advancement in comparative companies may result in greater volatility of the price of securities of such companies. Many technology companies have limited operating histories and prices of these companies’ securities have historically been more volatile than other securities due to increased competition, government regulation, and risk of obsolescence due to the progress of technological developments. The Fund may have a significant portion of its assets invested in securities of healthcare companies, which may be significantly affected by intense competition, aggressive pricing, government regulation, technological innovations, product obsolescence, patent considerations, product compatibility and consumer preferences, and may be more volatile than the securities of other companies. The cost of borrowing money to leverage may exceed the returns for the securities purchased or the securities purchased may actually go down in value more quickly than if the Fund had not borrowed. Foreign investing involves special risks including currency risk and risks related to political, social, or economic conditions. The Russell 2000® Growth Index is an unmanaged index designed to measure the performance of the 2,000 smallest companies in the Russell 3000® Index with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on the total market capitalization, which represents 99% of the U.S. equity market. Investors cannot invest directly in any index. Index performance does not reflect deductions for fees, expenses or taxes. Note that comparing the performance to a different index might have materially different results than those shown. Any views and opinions expressed herein are not meant to provide investment advice and there is no guarantee that they will come to pass. ©2018 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distrib- uted; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar percentile rankings are based on the total return percentile rank that includes reinvested dividends and capital gains (excluding sales charge) within each Morn- ingstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. If sales charges were included, performance would be lower and the rank may be lower. Rankings and ratings may be based in part on the performance of a predecessor fund or share class and are calculated by Morningstar using a performance calculation meth- odology that differs from that used by Fred Alger Management, Inc.’s. Differences in the methodologies may lead to variances in calculating total performance returns, in some cases this variance may be significant, thereby potentially affecting the rating/ranking of the Fund(s). When an expense waiver is in effect, it may have a material effect on the total return or yield, and therefore the rating/ranking for the period. As of September 30, 2018, the securities mentioned in this reprint represent the following as a percent of Alger’s assets under management: Veeva Systems, Inc. 0.55%; Cognex Corp. 0.33%; and Apptio Inc. 0.22%. Before investing, carefully consider the Fund’s investment objective, risks, charges, and expenses. For a prospectus and sum- mary prospectus containing this and other information, or for the Fund’s most recent month-end performance data, visit www.alger.com, call (800) 992-3863, or consult your financial advisor. Read the prospectus and summary prospectus carefully before investing. Distributor: Fred Alger & Company, Incorporated, Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / 800.992.3863 / www.alger.com


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