Asset Allocation for the Future

COMMENTARY

Market Insight

EATHERBIE CAPITAL

EATHERBIE CAPITAL

ASSETALLOCATION FOR THE FUTURE

When the world undergoes incredible change like it has in the past fewmonths, we think there is value for investors in reexamining big picture assumptions about what the future holds and how portfolios should be positioned. Some of these basic questions include: • Will we have inflation or deflation? • How will monetary and fiscal policy evolve? • What proportion of portfolios should be allocated to various asset classes? Economic Slack, Technology and Inflation We believe the economy may experience deflation or low inflation for the current year and possibly much longer due to the huge amount of slack in the global economy and the collapse of commodity prices. We also believe that new internet-based technologies, such as ecommerce that provides pricing transparency and applications that help better match supply and demand, are weighing on inflation. In our view, an economic recovery will occur, but its vigor is uncertain. We do not fully know how consumer spending patterns and proclivities to spend or save will change. However, while aggregate spending is hard to forecast, the market share shifts to areas such as ecommerce and cloud computing are not. Since macroeconomic trends can be difficult to predict, our stock selection continues to be guided by these idiosyncratic share shifts, not aggregate forecasts. Potential Impact of Stimulus It appears that we have entered a period of heightened government intervention. In this environment, fiscal and monetary policy may work more closely together. The recent pandemic is a good example of the central bank buying debt that the federal government issued. This type of “monetary finance” is unprecedented in its scope and the speed with which it is being implemented (see Figure 1).

Matt Weatherbie, CFA CH I E F E X ECU T I V E O F F I C E R CO - CH I E F I NV E S TMEN T O F F I C E R WE AT H E RB I E CA P I TA L , L LC

Brad Neuman, CFA S EN I OR V I C E PR E S I D EN T D I R ECTOR O F MA RK E T S T R AT EGY A LG E R

Figure 1: Federal Reserve Assets Trillions

U.S. Small Stocks

Bonds

$0 $1 $2 $3 $4 $5 $6 $7 $8

$6.9 Trillion

2008

2010

2012

2014

2016

2018

2020

2006

Source: Federal Reserve

EATHERBIE CAPITAL

COMMENTARY 2/4

EATHERBIE CAPITAL

While no one knows howmuch debt issuance and quantitative easing bond investors will tolerate before beginning to demand higher interest rates, we believe it seems likely that they will revolt at some point .

With this kind of intervention combined with large debt levels and slow economic growth, we believe interest rates are unlikely to move materially higher in the short term. It may be that as negative interest rates roll through the world, the amazing desire to pay to lend will wash up on U.S. shores, transported from Japan and Europe by the global capital seas. While no one knows howmuch debt issuance and quantitative easing bond investors will tolerate before beginning to demand higher interest rates, we believe it seems likely that they will revolt at some point. The demand for higher interest rates and ultimately society’s desire to mitigate the mountains of debt that have been built up may ultimately manifest in higher inflation and interest rates (see Figure 2). But that moment could be a long way off because ultra-low rates allow the government and other entities to service their debt. Only the market can provide the answer on timing. Cash, Bonds and Inflation In our view, the role that cash and bonds play in traditional asset allocations may become diminished and potentially lose relevance to assets such as gold or bitcoin in an environment characterized by deflation at first and then possibly inflation. In deflationary times, gold or bitcoin may be more efficient stores of value. In periods of higher inflation, they may be more likely to better preserve their value while cash is exposed to the corrosive effects of inflation and the value of bonds is hurt by higher interest rates. Under either scenario, we think it is hard to make a case for bonds as a durable component of a portfolio. The Appeal of Equities Over time, we believe equities will continue to be a popular choice among investors. Equities have provided a handsome 6.9% annualized real return over the past 150 years, unmatched by any other asset class in magnitude and longevity. Small capitalization stocks, in particular, have historically produced strong returns (see Figure 3). During deflation, their long duration may potentially help them outperform. In higher inflation, they may potentially grow their businesses even faster than inflation while bond cash flows are stuck in neutral. EATHERBIE CAPITAL

EATH

Figure 2: Growth of Global Debt

% of GDP

Trillions

$250

250%

Global Debt Debt/GDP

$200

230%

210%

$150

190%

$100

170%

$50

150%

$0

4Q01

4Q03

4Q05

4Q07

4Q09

4Q11

4Q13

4Q15

4Q17

4Q19

Source: Bank for International Settlements

EATHERBIE CAPITAL

COMMENTARY 3/4

EATHERBIE CAPITAL

Figure 3: Small Stocks vs. Bonds: Rolling 20-Yr Annualized Returns

% of Return

THE NIFTY 50

25%

U.S. Small Stocks

Small Cap STOCKS

Bonds

BONDS During the early 1970s, a group of 50 companies including General Electric, Coca-Cola and IBM that had consistent earnings growth and were believed to have bright futures were so popular with investors that their valuations soared. Their average P/E was about 42x, more than double that of the S&P 500 Index. The companies were considered to be “one-decision” stocks because investors believed they could buy them and then hold them forever.

EATHERBIE CAPITAL

EATH

20%

15%

10%

5%

0%

1969

1979

1989

1999

2009

2019

Source: Morningstar. Small cap stocks are the Ibbotson Associates U.S. Small Cap Stock Index and Bonds are the Ibbotson Associates U.S. Intermediate Term Government Bond Index.

Large amounts of cash may remain on the sidelines due to households’ desire for a higher level of liquidity; however, for those who invest in equities, we believe the U.S. market will be the market of choice. In our view, the U.S. will come out of the pandemic crisis with its relative geopolitical position improved versus the rest of the world. We think the 21 st century will be America’s because we believe our traditional advantages of geography, natural resources, military strength, the rule of law, deep capital markets, innovation and entrepreneurship are likely to dominate other problems like Washington, D.C. partisanship. The massive quantitative easing will move the U.S. market to eventual, though ragged, new highs in our view. We believe growth is likely to continue to to lead because it will be scarce. Growth stocks could even sell at very high price-to- earnings ratio (e.g., over 40x) levels not seen since the “Nifty Fifty” market of the early 1970s. In this type of environment, we believe strong performance is likely to depend on identifying companies whose products and services will experience growing demand and whose management teams can convert that rising demand into above-average earnings and cash flow growth. In an uncertain, probably low-trajectory recovery, such high-growth companies will be uncommon and increasingly sought after. At Alger and Weatherbie, we are passionate about investing in these types of companies.

Matt Weatherbie, CFA Chief Executive Officer Co-Chief Investment Officer

Brad Neuman, CFA Senior Vice President Director of Market Strategy

EATHERBIE CAPITAL

COMMENTARY 4/4

EATHERBIE CAPITAL

EATHERBIE CAPITAL

EATH

The views expressed are the views of Fred Alger Management, LLC (“FAM”) and Alger Management Ltd. (together with their affiliated entities “Alger”) as of May 2020. Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Alger. Risk Disclosures: Investing in the stock market involves certain risks, including the potential loss of principal. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Technology companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. 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 limited liquidity. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Important Information for US Investors: This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds. Important Information for UK and EU Investors: This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations). It is for information purposes only and has been prepared and is made available for the benefit investors. This material does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this material and should be satisfied in doing so that there is no breach of local legislation or regulation. Important information for Investors in Israel: This material is provided in Israel only to investors of the type listed in the first schedule of the Securities Law, 1968 (the “Securities Law”) and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995. The Fund units will not be sold to investors who are not of the type listed in the first schedule of the Securities Law. Certain products may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or countries. Alger Management, Ltd. (company house number 8634056, domiciled at 78 Brook Street, London W1K 5EF, UK) is authorised and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM and/or Weatherbie Capital, LLC, U.S. registered investment advisors, serve as sub-portfo- lio manager to financial products distributed by Alger Management, Ltd. Alger Group Holdings, LLC (parent company of FAM) and Fred Alger & Company, LLC are not an authorized persons for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and this material has not been approved by an authorized person for the purposes of Section 21(2)(b) of the FSMA. The S&P 500® is an index of large company stocks considered to be representative of the U.S. stock market. The Ibbotson U.S. Small Stock Index is a capitalization-weighted index which measures the performance of U.S. equities in the ninth and tenth deciles of market capitalization. The Ibbotson U.S. Intermediate-Term Government Bond Index is an unweighted index which measures the performance of five-year maturity U.S. Treasury Bonds. Performance data quoted represents past performance. Past performance is not a guarantee of future results. The following positions represented the noted percentages of Alger assets under management as of 2/29/2020: General Electric, 0.00%; Coca Cola, 0.40%; and IBM, 0.00%

Fred Alger Management, LLC 360 Park Avenue South, New York, NY 10010 / 800.223.3810 / www.alger.com

AAFFCOM0520