CEO Update and Outlook
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?
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