CityWire: Amy Zhang

PROFESSIONAL BUYER

JUL 2018 16

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Fred Alger Management’s Amy Zhang is sticking to her belief that the little guys can uproot the legacy players. She knows, because she did it herself

chance on me,’ Zhang says. ‘I want to support underrepresented female students in STEM because we don’t have enough students who can do that and I want to give back. Just like the under-the-radar companies that I want to discover, it’s kind of like planting a seed and watching it blossom into flowers.’ FINDING THE SWEET SPOT In the world of investing, Zhang also has a track record of discovering ‘seeds’ that have the potential to grow into flowers. Prior to joining Fred Alger Management in 2015, Zhang spent more than 12 years at Brown Capital Management, where she co-managed the now $5.1 billion Brown Capital Management Small Company fund. At Fred Alger, she has managed the Small Cap Focus fund since its inception, taking it from less than $14 million in February 2015 to more than $1.4 billion in assets today. The fund has returned 63.9% over the past three years to the end of May and ranks seventh out of 139 Small-Cap Growth funds tracked by Citywire. Zhang attributes the strategy’s outperformance to her core philosophy. That involves identifying and investing in small, exceptional companies undergoing positive

VICKY GE HUANG

T hirty years ago, Amy Zhang, born and raised in Shanghai, was selected from 2,000 students for a scholarship to attend high school in the US. Today she is a Columbia Business School alumna, the sole portfolio manager for the $1.4 billion Alger Small Cap Focus fund and founder of the AYZ STEM scholarship for freshmen from underrepresented demographics who intend to study science, technology, engineering or mathematics (STEM) at her alma mater, Manhattanville College. These seemingly disparate events are connected by an elegant juxtaposition. ‘I was a scholarship kid. I felt they took a

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I WAS A SCHOLARSHIP KID. I FELT THEY TOOK A CHANCE ON ME

changes and which have the potential to become large, successful companies. ‘We define smallness in terms of revenue because I think revenue is a better indication of size than market cap,’ Zhang says. ‘Market cap could be arbitrary.’ Zhang and her team generally look for companies with annual operating revenues of less than $500 million at the initial point of investing, but that figure can be a lot less in many cases. ‘Our sweet spot is probably $100 million to $200 million because we’re looking for the companies to double their revenue in three to five years. I call that the law of small numbers,’ she explains. GAUGING GROWTH A growing and durable revenue stream is important to Zhang because it suggests good financial quality and a chance for future growth. But an equally important metric for her is a company’s ‘moat’ – its competitive advantage. Zhang and the team spend a lot of time contemplating companies’ competitive advantages, especially if they are getting stronger over time. ‘Many of the companies that we invest in can transform their industry or create a new industry that is disruptive to the legacy players,’ she says. ‘They are usually science-based companies with proprietary products and services that are truly differentiated.’ One company that meets all the criteria is Pleasanton, California-based Veeva Systems, a cloud-based tech firm that provides subscription-only software applications for the pharmaceutical and life sciences industries. Veeva, which started out handling customer relationship management (CRM) for life science companies through a long-term partnership with Salesforce.com, has since branched out into developing a content management business called Veeva Vault. It is aimed at helping its customers manage very complex content-centric processes in what is a highly regulated industry. ‘There is a pattern to what we invest in. I always like a company that has strong cash-flow generating capabilities to support

ZHANG’S SMALL CAP FOCUS FUND HAS PULLED AHEAD OF THE RUSSELL 2000 GROWTH INDEX THIS YEAR DATA TO JUNE 30, 2018 / SOURCE: CITYWIRE/LIPPER

ALGER SMALL CAP FOCUS FUND RUSSELL 2000 GROWTH

80

70

60

50

TOTAL RETURNS %

40

30

20

10

0

10

20

FEB 15

JUN 18

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growth initiatives,’ Zhang explains. ‘When we started investing in the company, Veeva had the CRM business as a growing cash cow to support the new growth engine, Veeva Vault.’ Zhang says that since its rollout, Veeva Vault has been very successful but Veeva’s CRM business is also growing. Altogether, she estimates the firm’s revenues could grow by more than 20%. ‘It really exemplifies what we look for in a company. It has about $918 million in cash, no debt and spends 17% on

based Guidewire Software, which offers core back-end software for property and casualty (P&C) insurance carriers in the US and worldwide. Zhang explains that most P&C insurers are very paper-based with manual processes, but Guidewire provides data-driven software that not only can automate the workflow, increase efficiency and productivity, saving costs and headaches for the customer, but also provide real-time intelligence by turning data into actionable information for companies.

is very large, close to $8 billion, with very low penetration today,’ Zhang explains. ‘It generates a lot of free cash flow and spends 22% on R&D to stay at the cutting edge of the innovation. So it’s another example of a high-quality, high-growth stock.’ CAUTIOUSLY OPTIMISTIC Despite the high-growth, high-quality profiles of the companies in her portfolio, Zhang – who is certainly no stranger to small-cap stocks – also believes that investing requires a long-term horizon of between three and five years or beyond. ‘We think small-cap investing requires this mind-set of patience because small companies do not grow in a straight line,’ she says. ‘Through rigorous fundamental research, we spend a lot of time differentiating bumps in the road versus permanent impairments of fundamentals.’ Trained in the value investing camp of Columbia Business School, Zhang also keeps a close eye on downside protection. ‘I pay a lot of attention to the downside risk, especially the low-probability, high-impact events. I assess risk holistically for the portfolio,’ she says. ‘That’s also part of the reason why I want to own a focused portfolio, because I see that understanding reduces risk. We are not distracted and we are very focused on what we own.’ This is reflected in the strategy’s concentrated portfolio, which contains fewer than 50 holdings, paramount importance to me because paying acute attention to our holdings allows us to have higher conviction and bigger position sizes,’ she says. ‘That can potentially generate more alpha for our clients.’ Having been a math major in college, Zhang explains that the constant need to learn and understand things was what initially drew her to the world of investing. ‘While nobody can be perfect, we can always continue to perfect our craft, sort of like infinite lines,’ she says. ‘You can always do better.’ none of which are household names. ‘Understanding our companies is of UNDERSTANDING OUR COMPANIES IS OF PARAMOUNT IMPORTANCE TO ME BECAUSE PAYING ACUTE ATTENTION TO OUR HOLDINGS ALLOWS US TO HAVE HIGHER CONVICTION AND BIGGER POSITION SIZES

‘Many companies that we invest in automate inefficient manual processes using their software,’ Zhang says. ‘We like Guidewire for the

R&D, while continuing to expand margins and revenues,’ she says. ‘For the past 12 months, revenue was about $727 million and we think there is still a

long term because the insurance industry is

significant way for growth to go, as its addressable market is about $8 billion.’ The team is confident that scientific innovation and disruptive technology can drive long-term revenue and profitability growth, Zhang adds. The companies she bets on often demonstrate these same characteristics, although she emphasizes that any sector weighting is just a byproduct of her bottom-up selection. Another example is Foster City, California-

really in the early phase of reducing costs and improving revenue by replacing the IT infrastructure

that is really antiquated.’ Zhang also believes that companies such as Guidewire and Veeva

are pushing their industries into fresh cycles, forcing other firms to innovate in response. In the case of Guidewire, the numbers make this process clear. ‘For the past 12 months, revenue was about $594 million. We think the addressable market

ZHANG HAS ACHIEVED TOP-QUARTILE RISK-ADJUSTED RETURNS OVER BOTH ONE AND THREE YEARS DATA TO MAY 31, 2018 / SOURCE: CITYWIRE DISCOVERY AMY ZHANG FRED ALGER MANAGEMENT

BEST POSITION

3 YEAR RISK ADJUSTED PERCENTILE

1 YEAR RISK ADJUSTED PERCENTILE

The vertical axis shows three-year risk-adjusted percentile rank, the horizontal shows one-year risk-adjusted percentile rank. Size of the bubbles shows manager market share. Analysis at May 31, 2018. For more details, contact discovery@citywireinsight.com

Reproduced with permission by Media Licensing Co. (www.medialicensingco.com / + 44 (0) 20 3773 9320). Not to be reproduced without authorisation.

CITYWIREUSA.COM

This article reprint, originally published by Citywire USA on July 16, 2018, is considered sales literature for the Alger funds mentioned only and not for any other products shown. Please note that Citywire USA 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 June 30, 2018, the Alger Small Cap Focus Fund (the “Fund”) returned the following: Average Annual Total Returns (%) (as of 6/30/18) YTD 1 Year 3 Years 5 Years 10 Years Since Inception Class I (incepted 3/3/08) 24.56 35.90 18.03 16.36 11.83 11.45 Class Z (incepted 12/29/10) 24.74 36.34 18.38 16.69 — 14.40

(Since 3/3/08) 11.30 (Since 12/29/10) 12.72

Russell 2000 Growth Index

9.70

21.86

10.60

13.65

11.24

Morningstar Percentile Rank (Small Growth) Based on Total Returns Class I

6% 37/701 5% 32/701

4% 17/606 3% 14/606

7% 31/534 6% 23/534

31% 122/404

Class Z

Total Annual Fund Operating Expenses (Prospectus Dated 3/1/18)

Without Waiver I 1.21% Z 0.90% With Waiver 1.20%

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 February 28, 2019 to the extent necessary to limit the total annual Fund operating expenses of the Class I to 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 of Trustees, and will terminate auto- matically in the event of termination of Investment Advisory Agreement. 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. 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 portfolio 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 Russell 2000 Growth Index. Class Z shares are available to certain investors with an initial investment minimum of $500,000. Please consult the prospectus for more information. The performance data quoted represents past performance, which is not an indication or a guarantee of future results. Invest- ment 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 sensi- tive 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 companies’ 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, techno- logical 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 political, social, or economic conditions. 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 mar- ket 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 investment advice and there is no guarantee that they will come to pass. Citywire information is proprietary and confidential to Citywire Financial Publishers Ltd (“Citywire”), may not be copied and Citywire excludes any liability arising out its use. Citywire Trademark is owned by Citywire and that all rights are reserved to Citywire. The Citywire Manager rating is calculated by evaluating a manager’s three-year performance record and is updated monthly. The four ratings bands are assigned in the following way: the top 10% of managers gain the highest AAA rating; the next 20% will be awarded the AA rating; the following 30% will get a single A rating; and the remaining 40% will gain a Citywire + rating. Each Citywire rated fund manager will have one universal rating, reflecting the performance on every fund he or she runs across the 41 countries in the Citywire database. Alger Small Class Focus Class I was ranked, based on total return, 19, 9, 16, and 77 on 1-, 3-, 5-, and 10-year basis among 846, 776, 703, and 587 funds as of 6/30/18. As of June 30, 2018, the securities mentioned in this reprint represent the following as a percent of Alger’s assets under management: Veeva Systems, Inc. 0.34%; Guide- wire Software 0.21%. 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.

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

ALCWAZ-0818

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