Asset Allocation for the Future

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