Alger Morningstar Medalist Report: Capital Appreciation

Reprinted by permission of Morningstar, Dec. 18, 2020

The fund may invest in private firms, but the managers are selective and keep such stakes small. As of August, Kelly and Crawford had a 0.1% position in (now public) Palantir PLTR, a big- data analytics firm. Performance Pillar | Tony Thomas, Claire Butz 11/20/2020 Over lead manager Patrick Kelly’s tenure, this strategy has had a topnotch record. Since Kelly took the reins in September 2004 through October 2020, the A shares’ 13.7% annualized gain topped the Russell 1000 Growth Index’s 11.6% and placed in the top decile of large-growth category peers. The fund’s aggressive growth profile resulted in more volatility, as measured by standard deviation, than both its benchmark and peers over that period, but the fund’s risk-adjusted results were still competitive. The strategy tends to fall harder than its bogy during market drawdowns but recover more quickly in market rallies. Over Kelly’s tenure, the strategy captured 106% of the benchmark’s losses, though it secured 111% of its gains. The strategy fared a bit better than its bogy during 2020’s market drawdown. From the benchmark’s Feb. 19 peak to its March 23 trough, the A shares fell 29.0% versus the benchmark’s 31.0% loss. Consumer discretionary picks such as Amazon and Alibaba helped buoy the strategy during the market plummet. The strategy also outperformed during the subsequent market rebound due to healthcare names such as diagnostics and research firm Danaher DHR, a leading company in COVID-19 testing. From the start of the year through October, the A shares gained 25.3% versus the benchmark’s 20.1% and the typical peer’s 16.6%. Claire Butz 11/20/2020 A proven manager duo with an experienced supporting cast earn this strategy an Above Average People rating. Since taking the helm here and at Alger Spectra ASPZX (which can short stocks, unlike this strategy) in September 2004, lead manager Patrick Kelly has successfully executed the firm’s People Pillar Above Average | Tony Thomas,

aggressive growth approach. Both strategies have consistently been top performers in the large- growth category, as has Alger Focus Equity ALZFX, which Kelly began managing in late 2012. The strategy benefits from comanager Ankur Crawford’s deep experience in the tech sector. Crawford joined Alger in 2004 and rose through the firm’s analyst ranks, ultimately leading the central analyst team’s tech group. Her analytical experience helps Kelly handle this strategy’s typically large tech stake. The two work together to make portfolio decisions. The managers continue to build out their dedicated analyst team. Five dedicated analysts, two of whom joined the strategy in 2020, provide research for the managers’ three-fund suite. Each averages 18 years of industry experience. Kelly and Crawford also regularly draw upon the firm’s approximately 15-person central analyst team, especially when analyzing names in the portfolio’s lighter sectors such as industrials. Butz 07/20/2020 Fred Alger Management is home to some strong strategies, but a lot is riding on them. The firm earns an Average Parent rating. Like other investment boutiques, Alger faces industry challenges from investors’ preference for passive investing as well as fee pressure. Alger has responded by differentiating its signature growth approach by further concentrating some of its existing equity strategies or launching new focused options. Through that process it has brought on high-conviction managers, including Amy Zhang of Silver-rated Alger Small Cap Focus in 2015, Weatherbie Capital in 2017, and two managers from Redwood Investments in 2018. The firm created Z shares for its funds in 2010; they are cheaper than other Alger share classes but come in at average compared with the competition. Kelly invests at least $2.1 million total across the pair’s three shared strategies, and Crawford more than $300,000. Parent Pillar Average | Tony Thomas, Claire

The firm’s success rides on a few mandates, including Zhang’s and flagship Alger Spectra, rated Bronze and run by Patrick Kelly. Zhang and Kelly handle about half of the firm’s nearly $25 billion in assets under management, and though the firm is building dedicated investment teams alongside its central analyst pool, key-manager risk exists. Most Alger strategies have benefited from a market that has favored its style over the past five-plus years, but some strategies, such as Alger’s international offerings, have struggled and endured notable outflows. It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s middle quintile. That’s not great, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze. Price Pillar | Tony Thomas, Claire Butz 11/20/2020

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