Barron's: Dan Chung Profile


Back in 2009, several months after the stock market began its long climb upward from what we now know was its post-fi- nancial-crisis nadir, Dan Chung told Bar- ron’s that the bull market was just getting started. Time proved him right, and now, nine years later, he thinks the rally has more room to run. Chung, CEO and chief investment officer of Fred Alger Management, isn’t blind to the worries that have kept inves- tors up at night, such as trade, monetary policy, and the inevitable slowing of the economy. But, he argues, the forces that have lifted the market are far from spent. Tech giants like Apple (ticker: AAPL) are still producing strong earnings, while big macro themes—among them, increasing global travel and continued technological innovation outside the tech sector—still have room to run. The firm has certainly taken advantage of the long bull market, and many of its funds are outperforming their peers. The Alger Capital Appreciation Focus fund (ALAFX) landed in the top 10% of funds in the large-growth category over the past five years, while the Alger Small Cap Fo- cus fund (AOFCX) is the No. 2 performer year to date among its peers. The Alger Dynamic Opportunities fund (SPEDX) has returned 16.5% in the past year, more than twice the average for its Morningstar category.

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Chung was once a star analyst at Al- ger, and he is quick to share that success with his diverse team. His time as an an- alyst came during the dot-com boom and bust, so he knows a thing or two about what causes bull markets to rise and fall. While markets seesaw with the headlines, Chung remains focused on the forces driving the market higher and the indi- vidual stocks that will benefit. He spoke to Barron’s about why the tech boom is far from over, why Microsoft (MSFT) still has it, and how the internet is touching just about everything. Barron’s: You made your mark as a tech analyst during the go-go ‘90s. What did that experience teach you about where we are in the tech boom? Chung: One trend that is really clear to us is Internet 3.0. Internet 1.0 was the birth of the internet, the ‘90s until the bust. In- ternet 2.0, postbust, was characterized by the fact that a lot of the companies and the technologies were not really ready for prime time. They were not mature enough or affordable enough or easy enough to use to really be powerful tools for cus- tomers. Internet 3.0 is the period we are in now. I think it’s between three and five years old. This is really about the prod- ucts, the technologies, the ecosystem, the affordability, and digital business trans- formation. We’re still in the early innings of great growth. There’s a much better chance that the market is surprisingly higher over the next two years. Part of the reason is because Microsoft and Apple are not expensive stocks. They can carry the market a long way. Speaking of Microsoft, it’s a company that has transitioned from Internet 1.0 to 2.0 to 3.0. It’s also one of your largest holdings. What do you like in Microsoft? Microsoft is in an incredible position, and the numbers are showing it. It is one of the few megacap companies that’s accel- erating revenue and expanding margins. This is also a bit of a life-cycle change story. Microsoft was growing only 2% and 9% in 2016 and 2017. This year it is going to grow by 15%. That’s a gigantic acceler- ation. And at the same time, we estimate that its operating margin will expand from 30% to 35% by 2020. If you are impressed by $43 billion of operating income, it [also] has $55 billion-plus of cash, and even after all of the expenditures for the cloud, free

cash flow is about $40 billion. It has a 30% free-cash-flow margin. For a company as big and as old as Microsoft, that’s an in- credible thing. What’s driving that growth? The traditional Office Windows suite of products is getting decoupled from the PC sales. They used to be tied at the hip, but now everything has moved to software as a subscription. Microsoft is indisputably a leading enterprise software provider to businesses of all sizes globally and this transition to a subscription model is very beneficial to them. But it can’t just be Office, can it? The big growth driver that has led to Mi- crosoft beating revenues by over a billion dollars in each of the past two quarters

strong free cash flows, and are often very software-like. Medical and scientific imag- ing is about 35% of sales; radio frequency technology is about 30%; industrial tech- nology is about 20%; and the last business is energy systems, testing, and control of petroleum pipelines and power-genera- tion systems. What do they have to do with the in- ternet? Internet 3.0 infuses every part of what they do. For example, its Neptune line is one of the leading water meters, and they are Wi-Fi connected, so no one has to get out of the van to read your water me- ter. Roper is aggressively making use of the Internet of Things with sensors built into devices that can provide feedback on problems, and offer predictive preventive maintenance. The market doesn’t really appreciate that in 2001 5% to 10% of Rop- er’s revenue was recurring revenue [and] as of two years ago, more than 50% of revenue was recurring. In addition, be- cause it has been early to spot all of these opportunities to use technology and soft- ware for clients, about 50% of profits are basically coming from software. It’s a good example of how technology, Big Data, and even artificial intelligence are really work- ing in the world. Roper has gained nearly 30% during the past 12 months, and has outper- formed the S&P 500. Isn’t the good news already reflected in the stock? The stock is currently trading at a price/ earnings ratio of 20, basically in line with peers like Honeywell International [HON], Amtech Systems [ASYS], and Danaher [DHR]. It should have a premium for the quality of the business model, particularly in that transformation to more recurring revenue and much more software use than other industrials. While it shouldn’t be val- ued as a software company, when we look at some of the hardcore software compa- nies that service manufacturers, they have multiples of about 35. So just apply a low industrial 15 multiple, blend that with a 35 multiple for software, and Roper should be trading at 25 times rather than 20, even if it won’t necessarily get that expansion. Health-care companies are also bene- fiting from the growth of the internet. Can you tell us how that’s helping Tan- demDiabetes Care [TNDM], a maker of insulin pumps that you own? Tandem is a company that had a near-

is the cloud business. Microsoft is clearly No. 2 behind [AMZN], but it is now growing over 80% a year, and [the cloud] is a gigantic opportunity that will drive the company for years. At around $100, the stock is trading at only about 20 times next year’s free cash flow, and Microsoft’s dividend is about 2%. Today, it is trading at about 25 times current earn- ings, and that’s high, but by the end of the 1990s it got to 40 or 50 times, and Internet 3.0 is probably going to be better for Mi- crosoft than Internet 1.0. It has organic growth in one of the leading growth mar- kets in the world. It has all of the char- acteristics of something that could return 30%-plus over the next couple of years. Are tech companies the only one’s ben- efiting from Internet 3.0? Roper Technologies [ROP] highlights how Internet 3.0 has come alive across indus- tries. Roper is an industrial with an in- credible management team that focuses on cash return on investment as a disci- pline. It has niche businesses, which have

death experience. It has one of the most advanced pumps, and while they may look simple, they are pretty complicated. So Tandem faced delays and questions about competitiveness, and when it might run out of cash. The pump is now approved, is working quite well, and has been well received. Tandem got its products sorted out; it got its finances sorted out, and it is benefiting also from Roche Holding [ROG.Switzerland] and Johnson & John- son [JNJ] exiting the U.S. pump market. Tandem does have to prove it can be prof- itable, but our experience has shown that in small-caps, it is much more important that a company be in a healthy, growing market. Not to sound like a broken record, but what does that have to do with the internet? Tandem has a partnership with Dex- Com [DXCM], a company we also are

invested in, which makes a continuous glucose monitor. It measures levels con- tinuously and signals to Tandem when it’s time to do an automatic insulin dosage. The device’s alerts don’t have to be just for the user; they can be for doctors, so hopefully all of that data will provide even better ways for managing diabetes, a huge problem in the U.S. and in the world. A Tandem device looks kind of like an iPod, compared with a CD player from the big competitor in this field, Medtronic [MDT], which has around 70% of the market. Tan- dem’s pump is 40% smaller and lighter, and its software and connectivity is a meaningful advantage. This is another ex- ample of how internet, mobile, and data are changing health care. And it’s changing how retail brands reach their customers, too, isn’t it? Puma [PUM.Germany] hasn’t been cool

for a long time, and it struggled when it was part of luxury retailer Kering [KER. France]. Kering spun out Puma, and that will free up management to really inno- vate and invest in the business. Puma has an innovative marketing thread focusing also on what is really happening with sneakers, and it uses social-media celeb- rity influencers to boost its products, an approach that is actually fairly new. Nike [NKE] signs up big athletes and pays them a lot of money, but on social media it is a little bit behind. Puma’s not going to pay a lot of money to try to get a big sports star. Its margins had gotten down to 2.8% in 2015, but it’s targeting 10% by 2022. We see an opportunity here for 10% top-line growth and earnings growth of over 20%. Thanks, Dan. n

This article reprint, originally published by Barron’s on August 24, 2018, is considered sales literature only for the Alger funds men- tioned and not for any other products shown. Please note that Barron’s is an independent publication and the performance and rat- ings cited in the article do not represent the experience of any individual investor. Alger Small Cap Focus Fund (AOFAX) - Average Annual Total Returns (%) (as of 9/30/18) 1 Year 3 Years 5 Years 10 Years Since Inception Class A (Incepted 3/3/08) Without Sales Charge 51.46 27.93 17.12 15.27 12.57 With Sales Charge 43.54 25.65 15.86 14.65 12.00 Morningstar Category Average (Small Growth) 24.44 18.39 11.75 12.57 — Russell 2000 Growth Index 21.06 17.98 12.14 12.65 11.59 Morningstar Percentile Rank (ClassA- Small Growth) Based onTotal Returns 2% 13/702 2% 7/606 3% 14/532 6% 28/404 — TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/18) WithoutWaiver: A: 1.22% WithWaiver: 1.20% FredAlger Management, Inc.(“FAM”) has contractually agreed to reimburse Fund expenses (excluding interest,taxes,brokerage,and extraordinary expenses) through February 28,2019 to the extent necessary to limit the total annual Fund operating expenses of the ClassAto 1.20%of the class’average daily net assets.This expense reimbursement may only be amended or terminated prior to its expiration date by agreement between FAM and the Fund’s Board ofTrustees,and will terminate automatically in the event of termination of InvestmentAdvisoryAgreement.FAMmay, during the 1-year termof the expense reimbursement contract (“ERC”),recoup any expenses waived or reimbursed pursuant to the ERC to the extent that such recoupment would not cause the expense ratio to exceed the lesser of the stated limitation in effect at the time of (i) the waiver or reimbursement and (ii) the recoupment. Only periods greater than 12months 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 portfoliomanager.Ac- cordingly,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.

Alger Focus Equity Fund (ALAFX) - Average Annual Total Returns (%) (as of 9/30/18) 1 Year 3 Years

5 Years

Since Inception

Class A (Incepted 12/31/12) Without Sales Charge

29.38 22.58 23.18 26.30

21.12 18.97 17.68 20.55

17.29 16.03 14.02 16.58

18.80 17.70

With Sales Charge

Morningstar Category Average (Large Growth)

Russell 1000 Growth Index


12% 177/1430

13% 120/1258

8% 66/1129

Morningstar Percentile Rank (Large Growth) Based on Total Returns TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/18) 1.08%

Alger Dynamic Opportunities Fund (SPEDX) - Average Annual Total Returns (%) (as of 9/30/18) 1 Year 3 Years Only periods greater than 12months are annualized. Prior to October 15,2018 the Fund followed its current investment strategy,with the same portfoliomanagers,under the name“Alger CapitalAppreciation Focus Fund.” 5 Years

Since Inception

Class A (Incepted 11/2/09) Without Sales Charge

18.51 12.27 17.91 5.27

11.22 9.25 17.31 7.38

8.19 7.03

7.55 6.91

With Sales Charge

S&P 500 Index

13.95 5.13

14.60 5.26

HFRI Equity Hedge (Total) Index

4% 11/265

9% 13/194

14% 14/105

Morningstar Percentile Rank (Long-Short Equity) Based on Total Returns TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/18) 2.51%

BARDCHRPT-1018 Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / 800.992.3863 / Before investing, carefully consider the Fund’s investment objective, risks, charges, and expenses. For a prospectus and summary prospectus containing this and other information, or for the Fund’s most recent month-end performance data, visit, 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. Only periods greater than 12months are annualized. 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. Returns with sales charges reflect a maximum front-end sales charge on Class A Shares of 5.25%. For performance current to the most recent month end, visit or call 800.992.3863. Risk Disclosures: Investing in the stockmarket involves gains and losses andmay not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor’s shares,when redeemed,may be worthmore or less than their original cost.Growth stocks tend to bemore volatile than other stocks.Their prices tend to be higher in relation to earnings andmay bemore sensitive tomarket,political,and economic developments. Investing in companies of all capitalizations involves the risk that smaller,newer issuers may have limited product lines or financial resources,or lack of management depth.Companies of small andmedium size capitalizations are subject to greater risk than stocks of larger,more estab¬lished companies owing to such factors as limited liquidity, inexperiencedmanagement,and limited financial resources.Foreign investing involves special risks including currency risk and risks related to political,social,or economic conditions.There are additional risks when investing in an active investment strategy,such as increased short-term trading,additional transaction costs and potentially increased taxes that a shareholder may pay,which can lower the actual return on an investment. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such security.Transactions in such securities may bemade that seem- ingly contradict the references to them for a variety of reasons, including,but not limited to, liquidity tomeet redemptions or overall portfolio rebalancing.Holdings are subject to change. Mr.Chung ownsAAPL,AMZN,HON,MSFTdirectly in his personal accounts. Mr.Chung does not ownASYS,JNJ,KER,NKE,PUM,ROG,ROP,orTNDMdirectly in his personal accounts.By virtue of their ownership of shares of mutual funds advised byAlger,Mr.Chung and his family indirectly ownAAPL,AMZN,DHR,DXCM,HON,MDT,MSFT,PUM,ROP,andTNDM. FredAlger & Company, Incorporated is the parent company of FredAlger Management, Inc.The views expressed are the views of FredAlger Management, Inc.These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of themarkets,any security or any strategies managed by FredAlger Management, Inc.These views should not be considered a recommendation to purchase or sell securities. As of September 30,2018,the securities mentioned in this reprint represented the following as a percent ofAlger’s assets under Inc.6.97%; Microsoft Corp.6.34%; Apple 3.84%; Honeywell International 1.50%; Danaher 1.13%;TandemDiabetes Care Inc.0.52%; Medtronic 0.48%; DexCom0.34%; RoperTechnologies 0.10%;Johnson &Johnson 0.02%; Puma 0.02%; Roche Holdings 0.00%;Amtech Systems 0.00%; Kering 0.00%; and Nike 0.00%. ©2018Morningstar, Inc.All rights reserved.The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; 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 fromany 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 Morningstar 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 rankmay 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 calculationmethodology that differs from that used by FredAlger Management, Inc.’s.Differences in themethodologies may lead to variances in calculating total performance returns, in some cases this variancemay be significant, thereby potentially affecting the rating/ranking of the Fund(s).When an expense waiver is in effect, it may have amaterial effect on the total return or yield,and therefore the rating/ranking for the period.

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