CityWire: Amy Zhang

JUL 2018 16

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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

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