Big Bets Are Great... When They're Right
Portfolio manager Amy Zhang, CFA, spoke with The New York Times about how her fund is differentiated from its benchmark and its peers in this profile article.
M Y K
THE NEWYORK TIMES, SUNDAY, OCTOBER 14, 2018
THE NEWYORK TIMES, SUNDAY, APRIL 10, 2011
“All the News That’s Fit to Print”
Reprinted With Permission
SUNDAY, OCTOBER 14, 2018
Big Bets Are Great... When They’re Right These mutual funds took a risk with focused investing, and won big in the third quarter. ig Bets Are Great . . . When They’re hese mutual funds took a risk ith focused investing, and on big in the third quarter. FUNDS INTERNATIONAL STOCK FUNDS SPECIALIZED M UTUAL F UNDS R EPORT
By TIM GRAY
By TIM GRAY T he managers of three mutual funds have been making bigger-than- average bets on their favored ideas, and their shareholders recently benefited. In the language of the investing world, their funds are concentrated, with per- haps a few dozen holdings, instead of the hundreds typical of a big index fund like an Standard & Poor’s 500 offering. Focused investing like this can hurt if the chosen stocks plunge, but that didn’t happen to these funds in the third quar- ter: The managers’ bets paid off, and the results for each of these concentrated funds landed them among the quarter’s best performers. Alger Small Cap Focus Fund Amy Y. Zhang, manager of Alger Small Cap Focus, said she was adamant about distinguishing her fund from its bench- mark, the Russell 2000 Growth Index, and its peer funds. Concentration — and ignor- ing the benchmark’s allocations — is part of how she does that. “I don’t knowwhat’s in the benchmark,” she said. “I never look at it.” That may explain why Ms. Zhang’s fund looks dif- ferent. More than 80 percent of its assets are allocated to information technology and health care stocks, compared with a little less than 50 percent for the index. “I aim to be a pure stock picker,” not a benchmark hugger, she said. Ms. Zhang’s fund usually holds 50 or fewer small-capitalization stocks. Unlike many portfolio managers, Ms. Zhang said she assembles her holdings based on their revenue, not their market cap. Revenue is a better indication of a company’s life- stage, she said. An enduring outfit can falter and slouch into small-cap territory, but the energetic growers she seeks have small, but swelling, revenues. She said she tries to invest in companies with $500 mil- lion or less in revenue. “Our sweet spot is $100 million to $200 million,” she said. She said she divides the small caps into motorboats and sailboats. The ones she wants, the motorboats, have their own propulsion: “They’re disrupting and transforming amarket and taking amarket NA NA New Alternatives Midas Tocquevil e Gold Assets 5 Yr. ($mil.) Assets 5 Yr. ($mil.)
he managers of three mutual funds have een making bigger-than-average bets on heir favored ideas, and th ir shareholders ave lately benefited. In the language of th investing world, heir funds are concentrated, with perhaps few dozen holdings, instead of the hun- reds typical of a big index fund like a tandard & Poor’s 500 offering. Focused investing like this can hurt if the hosen stocks plunge, but that didn’t hap- en to these funds: The managers’ bets aid off, and the results for each of these oncentrated funds la ded them among the hird quarter’s best performers. lger Small Cap Fo us Fund my Y. Zhang, manager of Alger Small Cap ocus, said she was adamant about distin- uishing her fund from its benchmark, the ussell 2000 Growth Index, nd its peer unds. Concentration — and ignoring the enchmark’s allocations — is part of how he does that. “I don’t know what’s in the benchmark,” he said. “I never look at it.” That may ex- lain why Ms. Zhang’s fund looks different. ore than 80 percent of its as ets are allo- ated to information technology and health are stocks, comparedwith less than 50 per- ent for the index. “I aim to be a pure stock icker,” not a benchmark hugger, she said. Ms. Zhang’s fund usually holds 50 or ewer small-capitalization stocks. Unlike any portfolio managers, Ms. Zhang said he assembles her holdings based on their evenue, not their market cap. Revenue is a etter indication of a company’ life stage, he said. An enduring o tfit can falter and louch into small-cap territory, b t the ener- etic growers she seeks have small, but welling, revenues. She said she t ies to in- est in companies with $500 million or less n revenue. “Our sweet spot is $100 million o $200 million,” she said. She said she divides the small caps into otorboats and sailboats. The ones she ants, the motorboats, have their own ropulsion: “They’re disrupting and trans- orming a market and taking a market hare.” The sailboats, contrast, are ushed willy-nilly by economic breezes. Take Apptio, one of her fund’s holdings. It akes cloud-based software that helps ompanies manage their information tech- ology budgets. “Theymarry I.T. and finan- ial data to help clients make data-driven ecisions,” Ms. Zhang said. “They’re be- oming a must-have, instead of a nice-to- ave, for corporations.” Apptio invests heavily in research and evelopment — that spending equals more han 20 percent of its annual sales, a level bout twice as high as the typical company 1 72.58 1 10.99 1 260 1 56.59 1 NA NA 322 1 50.97 1 -0.37 4 72 1 46.52 1 NA NA 56 1 46.70 1 -6.91 4 65 1 38.31 1 6.34 1 74 1 30.30 1 4.94 1 95 1 38.93 1 6.63 1 53 1 47.76 1 7.40 1 97 1 29.74 1 5.10 1 227 1 47.84 1 4.06 2 165 1 35.45 1 0.62 4 65 1 34.93 1 -1.08 4 92 1 23.69 1 4.98 1 155 1 41.14 1 6.21 1 297 1 41.76 1 4.64 2 126 1 32.65 1 7.14 1 1356 1 34.40 1 10.11 1 679 1 28.27 1 NA NA 57 1 36.70 1 NA NA 75 4 9.60 4 3.95 2 2998 4 -0.56 4 -6.18 4 1232 4 8.61 4 8.11 1 19273 4 NA NA 9 4 11.36 4 5.78 1 575 4 35.51 1 6.29 1 275 4 4.85 4 2.63 3 82 4 7.57 4 6.28 1 65 4 6.76 4 7.22 1 2415 4 1 .18 4 0.65 4 297 4 17.61 2 5.54 1 341 4 12.94 4 3.75 2 95 4 0.36 4 4.65 2 64 4 4.15 4 5.92 1 4004 4 2.48 4 3.92 2 607 4 14.90 3 NA NA 87 4 3.89 4 5.09 1 564 4 3.17 4 NA NA 60 4 10.87 4 4.52 2 80 4 5.22 4 3.68 2 53 1 72.58 1 10.99 1 260 l % returns and rank 1 Yr. l % returns and rank 1 Yr. l % returns and rank 1 Yr. 5 Yr.
Total % returns and rank
WS 14.99 1 14.59 2 3.56 3 259 Metzler/Payden Euro Emerging Mkts ES 10.42 1 15.02 2 6.94 1 180 ING Euro STOXX 50 Index I ES 10.41 1 8.00 4 NA NA 750 ING Russi A ES 10.02 1 23.59 1 10.23 1 506 Putnam Global Equity A WS 9.62 1 16.51 2 1.09 4 869 Eastern European Equity A ES 8.95 1 13.09 3 10.44 1 50 FundX Ag ressive Upgrader WS 8.20 1 15.29 2 2.05 3 102 DFA Conti ental Small Company I ES 8.04 1 21.90 1 4.72 2 147 Morgan Stanley Global Infrastructure A WS 7.69 1 18.13 1 5.18 2 90 Delaware Intl Value Equity Instl FV 7.60 1 16.03 2 2.19 3 137 SP -8.14 4 33.76 1 8.01 1 117 Fidelity Advisor Global Capital Apprec I WS -7.98 4 13.45 3 -0.12 4 53 Dreyfus Emerging Asia A PJ -7.94 4 3.05 4 NA NA 62 Eaton Vance Greater India C PJ -6.46 4 8.73 4 NA NA 83 Oppenheimer International Small Co C FR -6.28 4 22.42 1 5.54 2 115 T. Rowe Price Africa & Middle East EM -6.24 4 -2.47 4 NA NA 197 T. Rowe Price Inst Africa & Middle East EM -6.23 4 -2.82 4 NA NA 125 ProFunds Precious Metals UltraSec Inv SP -6.13 4 43.67 1 2.38 3 66 Fid lity Jap n JS -5.90 4 -0.52 4 -6.75 4 548 Franklin G ld & Precious Met ls C SP -5.67 4 36.42 1 17.34 1 655 QUARTER’S LAGGARDS Total % returns and rank Assets Category Qtr. 1 Yr. 5 Yr. ($mil.)
ProFunds Oil Equipment Svc & Dist I ProFunds UltraSector Oil & Gas Inv Direxion Mthly Commodity Bull 2X Fidelity Select Energy Service Rydex Energy Services Inv Fidelity Advisor Energy I Fidelity Select Energy Vanguard Energy Index Adm Rydex Energy Inv Guinness Atkinson Global Energy
Rydex Inverse S&P 500 2x Strategy ProFunds UltraBear Inv Grizzly Short
Federated Prudent Bear C Comstock Capital Value A
JAMES KEIVOM FOR THE NEW YORK TIMES
Amy Zhang, portfolio manager for Alger Small Cap Focus Fund, aims to be a “pure stock picker,” not a bench hugger.
Rydex Inverse S&P 500 Strategy Inv Pimco StocksPLUS TR Short Strat Rydex|SGI Long Short Int Rate Strat Virtus Market Neutral I Altegris Managed Futures Strategy
share. The sailboats, in contrast, are pushed willy-nilly by economic breezes. Take Apptio, one of her fund’s hold- ings. It makes cloud-based software that helps companies manage their informa- tion technology budgets. “They marry I.T. and financial data to help clients make data-driven decisions,” Ms. Zhang said. “They’re becoming a must have, instead of a nice to have, for corporations. Apptio invests heavily in research and development — that spending equals more than 20 percent of its annual sales, a level about twice as high as the typical company in the Russell 2000 index. “We like to invest in companies that spend a lot on R.&D.,” she said. “History has shown — companies that invest in R.&D. outper- form the market.” Ms. Zhang’s fund, whose A shares have an expense ratio of 1.2 percent, returned 16.38 percent in the third quarter, com- pared with 7.71 percent for the Standard & Poor’s 500-stock index. Fund, managed by Nicholas F. Kaiser and Scott F. Klimo. The fund is sponsored by Saturna Capital in Bellingham, Wash. The Amana fund is designed to hold s ock acceptable t practicing Muslims. A tenet of Islam is that believ rs should nei- ther pay nor receive interest, which bars banks from the portfolio, as well as compa- nies with lots of debt, said Mr. Klimo, the deputy portfolio manager. The debt constraint ends up helping the fundwith riskmanagement, Mr. Klimo said. “We’re looking for solid companies that aren’t going to blow up,” he said. “And com- panies with strong balance sheets and cash generation can fund their activities inter- nally and aren’t relian on debt.” The fund also avoids “sin stocks” — those from companies that make or sell alcoholic beverages or operate in the gambling or sex-related entertainment industries, as well as those from companies that produce fossil fuels. The fossil fuel exclusion has nothing to do with religion. Rather, the managers decided that since they were already evaluating their holdings based on nonfinancial factors, it also made sense to assess e vironmental p rfor ance, Mr. Klimo said. As a result, the fund can market itself as one that explicitly fac- tors environmental, social and governance performance in its investment decisions. The screens don’t crimp the anagers, Mr. Klimo said: “A lot of the things we talk about are also common sense — don’t buy overly indebted companies, don’t buy sin IH IH JS -4.83 4 Category Qtr. 1 Yr. Category Qtr. 1 Yr.
Ahead of the Market
How three of the better performers of the third quar
Alger Small Cap Focus
Total % returns and rank
SP -1.39 4 57.45 1
Dynamic Gold & Precious Metals I
A Fidelity Select Natural Resources Franklin Natural Resources Adv Vanguard Energy Index Adm Fidelity Advisor Energy I S + ProFunds Oil Equipment Svc & Dist I Direxion Mthly Commodity Bull 2X ProFunds UltraSector Oil & Gas Inv Saratoga Technology & Comm I Fidelity Select Energy Service Rydex Energy Services Inv + 0 10 5 S.& P. 500 TOTAL RET.
NA NA 56
SP 0.82 4 51.33 1 18.91 1 2676
J NA NA 114 Oppenheimer Gold & Spec Minerals A SP -2.83 4 47.06 1 19.71 1 3715 American Century Global Gold Inv SP -1.53 4 46.08 1 12.88 1 1242 ProFunds Prec Metals UltraSector Inv SP -6.13 4 43.67 1 2.38 3 66 Invesco Gold & Precious Metals A SP 0.74 4 42.26 1 15.67 1 260 Rydex Precious Metals Inv SP -1.62 4 40.57 1 9.80 1 144 First Eagl Gold I SP 0.17 4 38.38 1 16.31 1 864 U.S. Global Investors Wld Prec Min SP -3.50 4 38.07 1 11.20 1 799 + 0 5 Van Eck Intl Investors Gold I SP -1.27 4 51.10 1
Alger Small Cap Focus
Total % returns a d rank
WS -0.65 4 -7.20 4
GMO Flexible Equities III
ber, the stock a of assets. Mr. remained pro Rydex Inverse S&P 500 2x Strategy ProFunds UltraBear Inv Grizzly Short Comstock Capital Value A Rydex Inverse S&P 500 Strategy Inv Federated Prudent Bear C ProFunds Rising Rates Opp Inv +7.
NA NA 79 NA NA 125
T. Rowe Price Inst Africa & Middle East EM -6.23 4 -2.82 4
EM -6.24 4 -2.47 4
Source: Morningstar Direct NA NA 197
T. Rowe Price Africa & Middle East
0.00 4 -1.93 4 -0.30 4
UBS Dynamic Alpha C
(#S065379) Copyright © 2018 by The New York Times Company. Excerpted with permission. For subscriptions to The New York Times , please call 1-800-NYTIMES. Visit us online at www.nytimes.com. For more information about reprints from The New York Times , visit PARS International Corp. at www.nytimesreprints.com. Fidelity Japan JS -5.90 4 -0.52 4 -6.75 4 548 Federated Market Opportunity C 1.25 4 -0.23 4 -1.63 4 266 Assets ($mil.)
Amy Zhang, top, portfolio manager for Alger Small Cap Focus Fund, aims to be a “pure stock picker,” not a bench NA NA 423
ING Japan TOPIX Index I
This article reprint, originally published by The New York Times on October 12, 2018, is considered sales literature for the Alger funds mentioned only and not for any other products shown. Please note that The New York Times is an independent publication and the performance and ratings cited in the article do not represent the experience of any individual investor. For the period ending September 30, 2018, the Alger Small Cap Focus Fund (the “Fund”) returned the following: Average Annual Total Returns (%) (as of 9/30/18) QTR YTD 1 Year 3 Years 5 Years 10 Years Since Inception Class A (Incepted 3/3/08) Without Sales Charge 16.31 44.90 51.46 27.93 17.12 15.27 12.57 With Sales Charge 10.18 37.31 43.54 25.65 15.86 14.65 12.00 Class Z (Incepted 12/29/10) 16.38 45.18 51.81 28.29 17.57 — 16.15 Russell 2000 Growth Index 5.52 15.76 21.06 17.98 12.14 12.65 11.59 Morningstar Percentile Rank (Small Growth) Based on Total Returns Class A — — 2% 13/702 2% 7/606 3% 14/532 6% 28/404 — Class Z — — 1% 11/702 1% 6/606 2% 8/532 — — TotalAnnual Operating Expenses (Prospectus Dated 3/1/18) WithoutWaiver: WithWaiver: A: 1.22% 1.20% Z: 0.90% — Only periods greater than 12 months are annualized. Fred Alger Management, Inc. (“FAM”) has contractually agreed to reimburse Fund expenses (excluding interest, taxes, brokerage, and extraordinary expenses) through Febru- ary 28, 2019 to the extent necessary to limit the total annual Fund operating expenses of the Class A to 1.20% of the class’ average daily net assets. FAM may, during the 1-year term of 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. This commitment may only be amended or terminated prior to its expiration date by agreement between FAM and the Fund’s Board of Trustees, and will terminate automatically in the event of termination of Investment Advisory Agreement. 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. 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: Investing 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 diversified 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 technological 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 compa- nies’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 politi- cal, social, or economic conditions. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. 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 invest- ment 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 percentage of Alger’s assets under management: Apptio, Inc. 0.22%. 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 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.
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