Big Ideas, Small Stocks


Amy Zhang’s introduction to investing came in the form of C++ computer code. As a math and computer science major at Manhattanville College in Harrison, N.Y., Zhang interned at a wealth management firm, debugging a program. The experi- ence piqued her interest in finance. “It was totally new to me—it requires constant learning,” says Zhang, who was born and raised in Shanghai and moved to the U.S. at age 17 after receiving a scholarship to a private high school in New Mexico. Inspired by the internship, Zhang changed her major to economics, with a concentration in finance. She completed her undergraduate studies in three years, and was accepted into multiple Ph.D. pro- grams and Columbia Business School; she decided to go for the M.B.A., though she deferred her studies for two years to work as a fixed-income analyst. “I gravitate to- ward complexity,” she says. “I like to take complex things and break them down.” For the past 15 years, Zhang, now 46, has channeled that skill into finding and vetting small, growing companies. In early 2015, she took over Alger Small Cap Fo- cus (ticker: AOFAX) and retooled the fund, which had $14 million in assets, to create a concentrated portfolio of some 50 compa- nies with less than $500 million in revenue when she invests. (She considers revenue a better gauge of size than market value.) The now $537 million fund has returned an average of 10.9% a year over Zhang’s tenure, better than the 8.7% for the Russell 2000 Growth index. It has beaten 83% of its Portfolio Manager, Alger Small Cap Focu Big Ideas In Small Stocks by Sarah Max Ideas, tocks Portfolio Manager, Alger Small Cap Foc Big Ideas In Small Stock by Sarah Max Talking Wi Amy Zhan Po tfolio M nager, Big I mall by Sarah Max Talking With Amy Zhang

Amy Zhang of Alger Small Cap Focus looks more at revenue than at market value.

Laura Barisonzi for Barron’s

Amy Zhang of Alger Small Cap Focus looks more at revenue than at market value.

Amy Zhang of Alger Small Cap Focus looks more at revenue than at market value.

Laura Barisonzi for Barron’s

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35% for its benchmark, the Russell 2000 Growth index. Its median 12-month sales growth is 17%, versus 9.5% for the index. Take Cognex (CGNX). Founded in 1981, it’s a leading supplier of machine-vi- sion products for industrial applications. The company initially benefited from the semiconductor boom, but “in 2000, 61% of its revenues were related to semiconduc- tors and today, only 4%,” says Zhang, who initially invested in the stock in February 2015 when it was in the high $30s; it was recently at $110. “They have evolved their core technology over time and are moving into new markets, like consumer electron- ics, industrial 3-D products, and airport security ID.” The company’s $585 million in revenue for the past 12 months is a fifth of what Zhang figures is a $2.9 billion total addressable market. Cognex has no debt and 29% net margins, she says. It’s a similar story for Veeva Systems (VEEV), which was founded in 2007 and went public in 2013. The company started with customer-relationship management software for the life sciences industry, but now offers a content-management platform that life sciences companies use to store, search, track, and share data, such as from clinical trials. “They’ve started with life sci- ences, but this platform can be used for any regulated industry,” she says, noting that Veeva has $618 million in revenue for what she says is an $8 billion total market. “They are just scratching the surface.” Both segments offer high recurring revenue and a competitive moat; switch- ing systems is costly and time-consuming. Veeva has 22% operating margins, no debt, and $725 million in cash. Zhang says Ve- eva should have no problem delivering 20% revenue growth over the next three to five years. Another top-10 holding, Insulet (PODD), is building on its proprietary Omnipod in- sulin-management system, which delivers to Type 1 diabetes patients continuous doses of insulin via tubeless pumps and disposable pods. Zhang points to several growth catalysts, including the potential

for Medicare and Medicaid reimburse- ment; a recent shift to direct sales in Eu- rope; and research into other applications, such as chemotherapy. Also: a partnership with Eli Lilly to develop pods for Type 2 diabetes, which is far more prevalent than Type 1. “That could launch in the first half of 2019,” Zhang says. Shares in Shopify (SHOP) have more than doubled over the past year, but this go-to e-commerce platform for small- and medium-size businesses has yet to reach its full potential. “This is a way to invest in the fickle consumer,” says Zhang. The com- pany, started in 2004 when its founders set out to start a snowboarding equipment site and found a dearth of e-commerce tools, has no debt and garners nearly half of its revenue from recurring subscriptions. Shopify has an $11 billion market value, which puts it in large-cap territory, but its potential to grow its $509 million in reve- nue warrants a spot in Zhang’s fund, which took a meaningful position early this year when it was trading in the $50s. “It’s rare to have a company that not only has very robust unit growth, but is also growing its wallet share, or revenue per customer,” says Zhang. While its core customers are small bricks-and-mortar companies that use its services for everything from web design to payments, Shopify is attracting larger enterprises, including GE, Nestlé, and Red Bull, via Shopify Plus. This speaks to what Zhang says she likes most about investing in small com- panies: seeing the potential in something and “watching it blossom.” That’s how she views her first decade in the U.S.: “People saw potential in me and invested in my ed- ucation.” In 2015, Zhang approached her former college advisor to establish the AYZ Schol- arship for incoming freshman from un- derrepresented populations who intend to study science, technology, or mathematics. Though the advisor still teases her about changing her major, “I think he has for- given me,” she laughs. “He’s even invested in my fund.” n

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peers in that period, according to Morn- ingstar. Zhang taps into Alger’s central re- search group, but works closely with her own team of three analysts and a research associate. Though all generalists, they have expertise in sectors that are the primary focus of this fund: technology, health care, consumer discretionary, industrial growth, and financials (namely fintech). Investors, Zhang says, shouldn’t con- fuse small-growth companies with start- ups. Most of the companies in her portfolio have at least a decade of operating history and stable revenue, but are undergoing positive dynamic change—such as a new product or beneficial trend—that offers the potential to double their revenue within five years. “We want high growth and high quality,” says Zhang, who was a small-cap portfolio manager at Brown Capital Management prior to joining Alger. The fund’s weighted median debt-to-capital ratio is 4%, versus

This article reprint, originally published by Barron’s on September 30, 2017, is considered sales literature for the Alger funds mentioned only and not for any other products shown. Please note that Barron’s 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, 2017, the Alger Small Cap Focus Fund (the “Fund”) returned the following: Average Annual Total Returns (%) (as of 9/30/17) QTR YTD 1 Year 3 Year 5 Year Since Inception Class A (Incepted 3/3/08) Without Maximum Sales Charge 4.39 23.30 20.33 12.97 13.79 9.14 With Maximum Sales Charge -1.09 16.84 13.99 10.96 12.57 8.53 Class I (Incepted 3/3/08) 4.35 23.32 20.23 13.08 13.97 9.34 Class Y (Incepted 2/28/17) 4.52 16.16 — — — 16.16 Class Z (Incepted 12/29/10) 4.52 23.62 20.74 13.45 14.30 11.64

(Since 03/03/2008) 10.64 (Since 02/28/2017) 12.19 (Since 12/29/2010) 11.93

Russell 2000 Growth Index






Morningstar Percentile Rank (Small Growth) Based on Returns Class A

46% 300/674 47% 307/674

28% 139/597 27% 136/597

37% 169/532 34% 151/532

Class I

Class Y

41% 262/674

24% 120/597

29% 133/532

Class Z

TotalAnnual Operating Expenses by Class (Prospectus Dated 2/28/17) WithoutWaiver: A: 1.36% I: 1.32% Y: 1.01% Z: 1.01% WithWaiver: 1.20% 1.20% 0.90% — Only periods greater than 12 months 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. Fred Alger Management, Inc. has contractually agreed to reimburse Fund expenses (excluding interest, taxes, brokerage, and extraordinary expenses) to the extent necessary to limit the total annual Fund operating expenses of the Class A to 1.20%, Class I to 1.20%, and Class Y to 0.90%, of the class’ average daily net assets. This expense reimburse- ment cannot be terminated. Fred Alger Management, Inc. may recoup reimbursed expenses during the one-year term of the expense reimbursement contract if the expense ratio falls below the stated limitation at the time of the reimbursement. Please see the prospectus for more details on contractual waivers. 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. Risk Disclosures: Investing in the stock market involves gains and losses and may not be suitable for all investors.As with any fund that invests in stocks, your investment will fluc- tuate in value, and the loss of your investment is a risk of investing.The Fund’s price per share will fluctuate due to changes in the market prices of its investments.Also, the Fund’s investments may not grow as fast as the rate of inflation and stocks tend to be more volatile than some other investments you could make, such as bonds. 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 than other stocks, making their prices more volatile. An investment in the Fund may be better suited to investors who seek long-term capital growth and can tolerate fluctuations in their investment’s value. There may be greater risk in investing in companies with small market capitalizations rather than larger, more established issuers owing to such factors as more limited product lines or financial resources or lack of management depth. It may also be difficult or impossible to liquidate a security position at a time and price acceptable to the Fund because of the potentially less frequent trading of stocks of smaller market capitalization.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.The Fund may have substantial holdings within a particular sector, and companies in similar industries may be similarly affected by particular economic or market events. Since the Fund concentrates its investments in technology companies, the value of the Fund’s shares may be more volatile than mutual funds that do not similarly concentrate their investments. Furthermore, because the field of medical technology is subject to substantial government regulation, changes in applicable regulations could adversely affect companies in those industries. In addition, the comparative rapidity of product development and technological advancement in those industries may be reflected in greater volatility of the stocks of companies operating in those areas. In addition, companies focused in the field of information technology can be significantly affected by intense competition, aggressive pricing, technological innovations, product obsolescence, patent considerations, product compatibility and consumer preferences. Investors should not consider references to individual securities as an endorsement or recommendation to purchase or sell such security.Transactions in such securities may be made that seemingly contradict the references to them for a variety of reasons, including, but not limited to, liquidity to meet redemptions or overall portfolio rebalancing. Holdings are subject to change. As of September 30, 2017, the securities mentioned in this reprint represented the following as a percent of Alger’s assets under management: Cognex Corporation, 0.22%; Veeva Systems Inc., 0.24%; Insulet Corporation, 0.34%; and Shopify Inc., 0.11%. 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. 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 rank may be lower. Rankings may be based in part on the performance of a predecessor fund or share class and are calculated by Morningstar using a performance calcula- tion methodology 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 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 ranking for the period.

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / 800.992.3863 /


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