Dan Chung recently shared his perspective on the markets, the attributes that have driven strong relative performance of Alger’s growth equity strategies, and several themes our investment team is actively researching. The call was hosted by Brad Neuman, CFA, the firm’s director of market strategy.
Dan Chung : Thanks, Brad, and thanks everyone for joining. Yes, unfortunately I have managed through a lot of crises and invested in a lot of crises, including all the way back to the economic crisis of the early nineties, when I was a corporate lawyer, as well – and the Asian crisis, 9/11 and the great financial crisis. I think one of the important things is to distinguish what is going to happen in the markets versus what's going to happen in the economy. And what my experience is telling me right now is that the very steep decline in stocks has priced in a very severe recession, but also that I think the market recovery will be well in advance of an economic recovery, and very likely quite – quite steep as well. It will take the economy quite a bit of time to hire people back and businesses to reopen, and I think it'll be sort of on a rolling basis. But it's very important to note that we entered this bear market and this economic crisis with the US economy in extremely good shape prior to it. Unemployment was only 3.5%, household debt had come way down since the great financial crisis. Consumer debt level services was at one of the lowest in decades. S&P profit margins were near highs. So it's important to note that the way we came into this crisis was not caused by upsets in the financial system or excess in the economy generally. It is of course a healthcare crisis, and a very unique one.
Please note this transcript is from a call on April 8, 2020 and it has been edited for clarity and brevity.
Brad Neuman : Good morning. I'm the Director of Market Strategy here at Alger. We're very excited to have our CEO and CIO, Dan Chung, joining us on the phone today. Alger has thrived for more than 55 years as a pioneer and leader in growth equities. Over that time, Alger has navigated seven recessions and countless crises, including the US/China trade conflict, the global financial crisis, the dotcom bubble burst, the Asian financial crisis and September 11th. Of course, Dan Chung has led the firm through much of that time – two decades now – and has been with the firm for 25 years. I'm excited to hear his perspective, and I know you are as well. I'd like to begin to get Dan’s perspective on the economy, markets and the investment opportunities that he sees. Dan, you've led Alger through some very difficult economic and market environments in the past. What are the parallels that you see, and the differences, relative to today's environment from your history – as CEO, as an investor – over the past quarter-century?
While we anticipate a very big GDP decline in the second quarter and weakness continuing in the third quarter, we would note that some parts of the economy are functioning well and even showing strength – things like food, agriculture, supermarkets, data centers and remote networking and logistics – some of the areas that are actually not only functioning well, but actually seeing increased activity. Right now we think markets are, of course, digesting both the healthcare crisis and our response to it, but we do believe it's a time to think about the opportunities in equities, and in particular probably adjusting allocations away from bonds back into equity. We note, of course, that because of the market action itself, you have the S&P down 20% in the first quarter and long-term treasury bonds up 15% in the quarter. That's not a pattern that's likely to continue or repeat. In fact, it's likely to reverse as we get better news about the healthcare crisis first and then the economy second. Brad Neuman : Thank you. Looking beyond this crisis, which will presumably end at some point and let us all go back to work and out of the house to the way our lives used to be, what's your confidence level in equities and the Alger way of investing in growth and change going forward? Dan Chung : I believe that growth is going to benefit from this crisis. The Russell 3000 Growth index outperformed the value by, I think, 1,200 basis points in the first quarter. We see businesses and consumer behavior is significantly changing – obviously sheltering in place, remote working – but some of these changes are going to accelerate growth trends that we'd already been investing and identifying for our clients. We think that the trend towards digital transformation of businesses, e-commerce, online for consumers – of course these things have been in place for many years, even decades. But we think that the experience that we're having during this crisis will actually mean that, even after we've returned it to normal, some of the trends will find increased adoption stays with them as businesses and consumers use new technologies and these new ways to benefit their businesses and also their experience with these new technologies.
I think that the data supports that in particular. If you look at the VIX, in past panics it's been true that when the VIX hits over 40 – and we hit over 80 in this recent selloff panic – the one- and three-year returns typically are 32% and 58% historically. And we know stocks have historically outperformed bonds over the long- term. Over the past 70 years, it's 100% of the time when you're looking at 20-year rolling basis that stocks outperform bonds. But even more importantly, it's two thirds of the time on a one-year basis and three-quarters of the time on a five-year basis. And obviously the median returns for equities are substantially higher than bonds. All of that plus what we're doing to adjust to this crisis, lends me to believe that we're going to see a resumption of growth outperformance versus value, and also strong equity returns as we come out of this crisis. Dan Chung : Operationally, I'm very happy with the investment team. We haven't missed a beat. Everyone is working remotely, and technology enabled Alger to make the transition relatively seamlessly. We've had extensive video calls and communication on services like Jabber to make sure that everyone on the team is on the same page and that the investment research is focused where it needs to be. There's even some advantages to working this way for us. I think one is we've done a lot of conferences where screen-sharing – multiple people sharing their screen – and going over financial models and market analyses, it's a lot easier to share a screen in detail when we all have our own computers in front of us than it is, say, in a conference room. That’s been kind of interesting. Finally, with no one traveling and everybody online, we've had very, very fast response rates from the team when the questions are asked, and also the ability to do a lot of deep thinking and research. The cancellation of conferences, in my view, isn't necessarily a negative for a large part of what Alger does. We are fortunate that our business is largely conducted, if you will, digitally. Brad Neuman : Can you comment on Alger’s business in this environment, both from an operational and a fund flow perspective?
On the business side, I've been very pleased to see clients who know us well – and I hope many of you are online; thank you. Our inflows have actually been quite a bit stronger than we had expected, including the month of March. Even with all the volatility, we are seeing clients very engaged, recognizing the opportunity. We have had year-to-date net outflows, in particular in large cap, but we've had net inflows in most of the small cap strategies, as well as the long/short strategy. Overall the business is holding up very well and we are seeing, I think, good engagement by a lot of our client investors. Brad Neuman : I guess that business environment is translating, so far, into strong performance. This past quarter was obviously very difficult. I think you noted earlier that the S&P 500 was down 20% amidst this global pandemic. Yet, as I noted earlier, Alger’s strategies had strong relative performance. What do you attribute this performance to? Dan Chung : We have a very consistent process. What I mean by that is the investment process of Alger of course includes our philosophy of looking for Positive Dynamic Change. We are constantly looking for opportunity in every sector, but very importantly, especially in this market crisis, is that we also do a lot of risk/reward modeling. For every company that we follow, and of course every one that we own, we have built bear, base and bull case scenarios – fundamental model of these different scenarios, as well as what valuations we think they imply for each company. The key part is this risk/reward modeling is not something we just devised or do during crises. It's what we do every day, every year, for more than 20 years that I've been at Alger. That means we believe we're well prepared when crisis happens to hopefully recognize where value is being created – where extraordinary value is being created – and also to recognize, on the other end, which stocks in our risk/reward modeling were perhaps closer to peaking or showing more downside than we'd like to take. Part of it is consistency, but it's also being prepared to handle the crisis before the crisis occurs.
A key attribute for why we are performing, I think, is the experience of our investment team. And there's an extraordinary amount of experience at Alger. Mine going back to the mid-nineties and all the crises since then, but Patrick Kelly joined the firm in the 1990s with me, and he helped me lead this company out of 9/11, as well as the internet bubble. Ankur Crawford has been at the firm since 2004, so she saw the great financial crisis and other crises. Teresa McRoberts, who heads our healthcare strategy, was an analyst with me way back in the 1990s. So we have a tremendous amount of experience and it's that experience coupled with the consistent process and the risk/reward modeling that we do. We do look at how this change will impact long-term fundamentals. It's not just about the short term, it's also about the long term and what businesses will change, what industries will change going forward. And of course many – many will be hurt going forward by what's happening. Others perhaps will actually benefit from it. The Alger process and philosophy is well tuned to taking advantage of that in my opinion, and looking – looking both short term and long term for performance. I'm very pleased with the team, and I'm also very confident that we have both the experience and the process to manage through this. Brad Neuman : In light of those changes that we're seeing in how people and businesses conduct themselves and the operational environment, have you directed the investment team during this period differently? Or maybe you can comment on your direction as CIO to the investment team – how that's changed and – or what you're telling them to look for and research and analyze.
Dan Chung : The fundamental work is actually kind of the same. The analysts and portfolio managers are always talking to the management teams, but, even more important, talking to the industry environment. This includes their competitors, suppliers, customers and experts. They are trying to get non-consensus insight onto what is happening with companies and industries. And we're, again, very fortunate that a lot of that is easily done remotely. And today, even more so than in the past, because companies can't go to a conference, because they don't want to welcome visitors to their office, as we often like to go travel to them, they're hosting more conference calls with analysts and portfolio managers. That is quite good for us. We have a big team – there's 55 people on the Alger team -- which is actually one of the larger teams, I think, per AUM dollar. It actually allows us to do a lot of these calls and it allows us to be very efficient in covering, if you will, the terrain. The one thing I think I'm directing everybody to make sure they're focused on is on what positive changes are occurring. What is being accelerated, and also the longer term, like what new changes may arise out of this pandemic and its resolution, and what industries and companies might be benefited by it. We're also looking out for the reverse. We're challenging ourselves to make sure that trends that we thought were good growth trends in the past, when the economy recovers, will those still remain good growth trends, or perhaps will this somehow change, either businesses’ or consumers’ perspective on those. There's not much change in the process, but there is of course an adjustment to the nature and context of the current crisis. And that's always unfortunately different. Every crisis has its own characteristics. Brad Neuman : I noticed in a lot of your remarks thus far that you've kind of hinted at this pandemic accelerating, potentially, themes that we may have invested in, or creating new themes, and how that crisis is actually creating changes in the economy and what I'm guessing is opportunities for the investment team. Maybe can you talk a little bit about what some of those themes are that you think may have been accelerated or created as a result of the global pandemic?
Dan Chung : Sure. Well, remote working. Companies everywhere are being forced to try it on a massive scale with all of their employees, something that many had not foreseen. We're all going to be measuring what kind of productivity that we see from this. And some companies may see more productivity than they anticipated. After this is done, we are likely to see more flexible policies about remote working, and we'll see very probably investments in communication platforms, in virtualization software and things like that. Now, as we're doing all this remote working, of course, there are new concerns that arise. Cybersecurity has been one of our themes – a concern for companies and consumers. But now it's proving to be not only more non- discretionary than ever, but it's also having a shift. In particular, cloud-based cybersecurity providers are very well positioned for the needs of enterprises with more and more endpoints, more and more remote workers. I'll particularly note that the traditional security vendors were largely targeted around protecting the hardware, the corporate network, right? The on-premises attacks. Now we're dealing with a very different thing with workers working from their homes and apartments and working on cell phones, as I happen to be right now. The cybersecurity needs and the vendors are different than the traditional ones. Cloud adoption – clearly a big growth trend. But what we're seeing now is just a skyrocketing growth in cloud usage, both consumer and business. And for example, internet usage in Italy's up 90%. Comcast reported internet usage up 32% month to month in March. Verizon is seeing video gaming online up 100% and office connections up 50%. The cloud adoption continues, but also the need for both the platforms, like Microsoft, but also the hardware companies that provide and power the infrastructure to ramp up and meet that demand. We were already fairly excited about the upcoming 5G higher mobile speeds, but that combined with the increased usage today is going to be very big opportunity for a lot of providers in our opinion.
Next, e-commerce and retailing. Millions of Americans are using online food ordering and delivery for the first time, and I think it’s quite likely that many will like this way of grocery shopping and will not go back to the physical stores the way they used to. We've seen credit card data says that spending is down 36% just last week, but e-commerce spending is up 27%. That trend is clearly happening not just at Amazon but across the e-commerce retailing landscape. And we think that you'll see increased investments in e-commerce capabilities across retailers, department stores, brands, businesses. Finally, healthcare. We are trying to think about how we can support and honor the work that our healthcare workers are doing on the front lines. And along with them, the logistics and transportation workers and, of course, first responders who are keeping us all able to be home and safe. But in healthcare there's going to be some major changes. We've already liked the trends of digital diagnostic and analysis tools. We're going to see that it will be vital for our national security and handling the next crisis in a quicker way. Obviously things like better, quicker testing, rapid drug development platforms – we think those will continue to see, and maybe even see increased, interest in investment and adoption. The most important frontline is the delivery of actual healthcare services to people in my opinion. And we had already, prior to the crisis, been investors in and liked trends like telemedicine, robotic surgery, electronic medical records and the companies that provide these tools. Telemedicine has seen a tremendous surge in adoption to respond to the crisis. But it is also one we'd done some surveys already with doctors who indicate that actually they like seeing patients as efficiently without actually personal exposure, but they like using it with their patients, and their patients like using it. I think this is a trend that we'll see after this crisis is over. It will be viewed as a much more efficient way to deliver medical care, primary and otherwise. We believe we'll see that adoption curve accelerate after this, as well as other kinds of improvements in healthcare delivery. Those are
some of the major themes that we're seeing that are benefiting from, or at least seeing increased adoption from, the crisis.
Brad Neuman : I think your comments are so interesting because, at a time when, from a financial perspective, so many investors are thinking about risk and downside, that there's actually opportunity – financial opportunity created out of this terrible situation. I think it's something that a lot of folks don't spend a lot of time on and maybe aren’t aware of. You painted a positive long-term view – both for the asset class, and growth stocks in particular, and these themes. But for investors who don't want to add a lot of exposure to equities and aren't getting the returns they need from fixed income with yields being so low now, partially as a result of this pandemic, what do you suggest they do with their capital? Dan Chung : As I said earlier, I think most investors, as a result of market action, are going to be over-weighted to cash and bonds and underweighted to equities. I think sound financial advice is you want to maintain your discipline around your allocations so this is the time to reallocate to equities as a result of the market moves. I of course also understand perfect timing – no one has it. I don't have it, Alger doesn't have it, and no one should try to perfectly time any of this. So how do you maintain the discipline but also of course reflect the fact that the near-term concerns are still very high and there is a lot of uncertainty? The strategy is Alger Dynamic Opportunities, which is our long/short strategy. This is benefiting from Alger’s time-tested philosophy in my opinion. The long part of the portfolio reflects what we believe are our “best ideas” across all of our strategies, and it's driven exactly by the same process and team of our long-only strategies are, but it doesn't have the full exposure to the stock market because of the shorting.
We try to have not only less exposure to the stock market, but also identify companies that we believe are going to be hurt by this recession and that may not recover from it. And that is what we do through the shorts, so you get less volatility than a long-only strategy. It is a conservative design but it still provides classic Alger opportunistic equity stock-picking. I believe it could be a good choice for investors who want to reallocate towards equities but want to be cautious about how aggressively they do so in the near term. Brad Neuman : Thank you all again for taking the time. We hope you're all safe and healthy and are enduring as best you can during this very difficult time. And we just want to let you know that Alger is here for you. We value your business. Please reach out to your local representative with any questions or if there's anything we can do for you at all to make this easier for you. Again, thank you so much.
Dan Chung : Thanks, everyone. Thanks for listening today, and be safe.
The views expressed are the views of Fred Alger Management, LLC as of April 2020. 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 Fred Alger Management, LLC. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Risk Disclosures : Investing in the stock market involves risks, and may not be suitable for all investors. 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. A significant portion of assets will be invested in technology and healthcare companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Short sales could increase market exposure, magnifying losses and increasing volatility. Leverage increases volatility in both up and down markets and its costs may exceed the returns of borrowed securities. Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, political or regulatory event than a more diversified portfolio. Investors whose reference currency differs from that in which underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Past performance is no guarantee of future results. 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. 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 authorized 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-portfolio manager to financial products distributed by Alger Management, Ltd. Alger Group Holdings, LLC (parent company of FAM) and Fred Alger & Company, LLC are not 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. 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
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