With a high-conviction portfolio of approximately 50 stocks, Matthew Weatherbie, George Dai and Joshua Bennett, managers of Alger Weatherbie Specialized Growth Fund (formerly Alger SMid Cap Focus Fund), believe they have found the right spot to benefit from diversification, while concentrating on their best ideas. Specializing in smaller cap growth stocks, an under-researched part of the market, the fund is able to uncover growth opportunities early through intense research and a focus on quality. Finding Quality Growth What is the history of the fund? The Alger Weatherbie Specialized Growth Fund has existed since the early 2000s and was managed by Jill Greenwald for many years. In late 2016, Greenwald retired from the firm. At approximately the same time, Weatherbie became a wholly owned subsidiary of Alger. Weatherbie’s mandate was to assume the management of the Alger Weatherbie Specialized Growth Fund and make it similar to our Weatherbie Specialized Growth strategy, a portfolio available to institutional investors for more than 20 years. How does your fund differ from its peers? At heart, we are high-quality, smaller cap growth investors and we have the flexibility to buy across the small and mid cap universes. We buy companies that we believe can grow into mid cap growth companies when they are still small. By design, our average market cap is lower than the market cap of the funds in the mid cap category. Also, we “fish in a different pond” because we look for high-quality companies not only in dynamic growth areas, such as health care and technology, but also in mundane industries, where we find stocks that meet our criteria for quality and growth but may have been overlooked by other smaller cap growth investors. Another differentiating factor is the sheer experience and the full-time focus that Weatherbie Capital has in the asset class. We have five investment professionals, who have worked together for 11 years and each have about 20 years of experience in the business. Specialized growth investing is all that we have done throughout the existence of Weatherbie Capital. Finally, our unique approach to portfolio construction and portfolio management is another differentiating factor. What core beliefs drive your investment philosophy? As growth investors, we believe that earnings and earnings growth ultimately drive stock prices. We build a high-conviction portfolio of smaller cap growth companies that we call the Weatherbie 50. Over time, we believe the underlying earnings growth of these companies drives their stock prices higher. That’s the fundamental concept of our investment philosophy. Another of our core beliefs is that smaller cap stocks represent the most exciting area to add value because they are less heavily researched. By focusing exclusively on this part of the marketplace and by being experienced and highly motivated to perform well, we believe we can identify these opportunities early to the benefit of our clients. As we look for attractive growth, we tend to find stocks that fit two main categories. The first category is what we call foundation growth, which represents at least two thirds of the portfolio. It includes highly predictable, easily understood companies, often from mundane industries. The other category is what we call opportunity growth, which represents up to one third of our assets. An example of such a stock would be a biotech company that could eventually earn the status of a foundation growth stock. An opportunity growth stock could also be a later-stage company in a new, dynamic growth phase. It could be driven by a new management, a new product cycle or a new market.
Matthew A. Weatherbie, CFA CEO, Co-CIO
Matthew Weatherbie founded Weatherbie Capital, LLC in November 1995 and is Chief Executive Officer and Co-Chief Investment Officer of Weatherbie Capital. Matt is a Portfolio Manager on the Alger Weatherbie Specialized Growth Fund. Matt has 46 years of investing experience. Prior to founding Weatherbie Capital, Matt was Managing Director and the Portfolio Manager of the Putnam Voyager Fund from October 1983 through April 1995 at Putnam Investments. Prior to his tenure at Putnam, Matt was a securities analyst and portfolio manager at MFS Investment Management in Boston. Matt graduated from the University of Toronto and received his M.B.A. from Harvard Business School. He is a CFA charterholder and is a member of both the CFA Society Boston and the CFA Institute.
H. George Dai, Ph.D. Senior Managing Director, Co-CIO
George Dai is Senior Managing Director and Co-Chief Investment Officer of Weatherbie Capital,LLC. George is a Portfolio Manager on the Alger Weatherbie Specialized Growth Fund, the Alger Dynamic Opportunities Fund, the Weatherbie Specialized Growth Strategy and the Weatherbie Long/Short Strategy. Additionally, George maintains research responsibilities in the diversified business services, healthcare, and technology areas. George joined Weatherbie Capital in March 2001 and has 21 years of investment experience. Prior to joiningWeatherbie, he was an equity analyst with 1838 Investment Advisors. George received his M.B.A .from the Wharton School, University of Pennsylvania, (Director’s List), and his Ph.D. in chemistry from Johns Hopkins University. Previously, he earned a B.S. from the University of Science and Technology of China and was a pharmaceutical research scientist at Procter & Gamble.
All of our work is governed by the “Weatherbie way”, which essentially is finding quality companies ahead of our peers. Quality and growth are key aspects of our philosophy. While finding growth is relatively easy, finding quality growth is a different thing. Being able to find quality growth companies ahead of our peers is our source of outperformance. How do you define the Weatherbie way? Could you be more specific? The Weatherbie way is a three-by-three approach, which includes three quantitative and three qualitative metrics. The quantitative metrics are earnings growth of at least 20%, return on invested capital that’s bigger than the cost of capital and a strong balance sheet supportive of the business model. The three qualitative metrics are management with a strong track record and shareholder-aligned interest, being a seasoned company and, most importantly, having a sustainable and enlarging competitive moat. We establish the quality of management through face-to-face interviews, where we build understanding of the management’s capabilities in stewarding our clients’ capital. An enduring sustainable competitive advantage should ideally be growing over time. We look for companies with some strong experience and track record of success, because those qualities give us confidence when analyzing the company’s future growth and profitability. These six metrics form the Weatherbie way. The foundation stocks, which typically make up more than two thirds of the portfolio, are companies that would generally check all six boxes. The opportunity stocks sometimes may not meet all the criteria, but we believe that they will mature into steady growers over time. Do you invest in companies that aren’t profitable yet? For some companies we are reasonably confident to project their future earnings. Some recent IPOs don’t have earnings yet, but can present growth opportunities. If we have confidence in the business model, even if a company is not profitable, we can still invest on the basis of the future sustained profitability. We mostly invest in profitable companies, but there are some stocks in the portfolio that don’t have earnings yet. What are the key steps of your investment process? First, we combine bottom-up selection with macro analysis. We are a bottom-up fundamental shop, but we do understand the macro picture as well. The second step is analyzing the companies, both quantitatively and qualitatively. When we invest in a company, we think of ourselves as owners. We try to understand every aspect of the business, including its market, customers, suppliers, competitors and the value that the business brings to the table. We also consider the starting point, the budgeting process, the size of the investment needed, the expected growth, the employees, the culture, etc. We do a lot of qualitative thinking. After the extensive research process, we need to be able to quantify the prospects of these investments. We do detailed proprietary modeling of every line of the P&L, including revenues, cost of goods sold, operating expenses and operating income. We examine how much cash the company generates and how much money it loses, how much money it has on the balance sheet, and how many years of cash it has left. How is the research team organized? We are a research-driven organization. The research process starts with identifying opportunities. Then we dig deep to confirm an opportunity or reject it. When we look for ideas, we divide the market into dynamic growth areas. Such areas can be consumer or health care, but also diversified business services, where we do a lot of research. Each analyst works on at least two of those dynamic growth areas and each dynamic growth area has at least two analysts on it. That is a redundancy built into the process, which we hope makes sure that we don’t miss any great growth ideas. Overall, we are specialists in the dynamic growth areas that we follow. Our investable universe consists of about 1,500 U.S. stocks. We apply the six criteria to this universe and each analyst identifies interesting ideas within that group, even if they don’t meet all of our criteria, to get to 350-400 closely followed stocks. We only initiate positions in companies with a market cap range of $300 million to $2.5 billion at the time of entry.
Joshua D. Bennett, CFA Senior Managing Director of Research
Joshua Bennett is Senior Managing Director and Director of Research at Weatherbie Capital, LLC. Josh is a Portfolio Manager on theAlger Weatherbie Specialized Growth Fund, the Alger Dynamic Opportunities Fund, the Weatherbie Specialized Growth Strategy and the Weatherbie Long/Short Strategy. Josh also has research responsibilities in theconsumer, industrials, technologyanddiversified business services areas. Josh joined Weatherbie Capital in July 2007 and has 19 years of investment experience. Prior to joining Weatherbie, Josh was an Equity Research Analyst at MFS Investment Management in Boston where he focused on the Aerospace/Defense and Transportation sectors. Josh received his M.B.A. from the Tuck School of Business at Dartmouth (Edward Tuck Scholar with Distinction) and he earned a B.A. in Economics (Summa Cum Laude) from Wheaton College (IL). Josh is a CFA charterholder and is a member of both the CFA Society Boston and the CFA Institute.
Could you illustrate your research process with some examples? A great example would be FirstService, a residential real estate services company, which has grown at about a 20% compounded annual growth rate over 20 years. The industry is growing at single-digit rates, but FirstService has dominated the competition. It provides all types of real estate services that the owners don’t want to do themselves, such as mowing the lawn, dealing with the insurance contracts and the homeowners association, managing the pool, the clubhouse or the golf course and hiring the concierge. These are simple services, which are difficult to do at scale, so FirstService beats the competition in terms of its service level. The company has many of the characteristics that we look for. It has a high-quality management, long-time experience, a known and understood competitive set and the potential to reach our desired growth. Its return on invested capital is improving over time; it has a strong balance sheet and free cash flow to support growth. It meets our criteria, especially in terms of the quality of management and its sustainable competitive advantage. We spend a lot of time on competitive analysis, understanding the size and the growth of the market, the players and the advantage of the companies. FirstService illustrates the type of Weatherbie growth stocks that we look for, which is a company that works predominantly in the U.S., trades on U.S. exchanges and has a dominant position. The company grows with the market and benefits from the new communities built as its reputation spreads across the industry. FirstService often competes against regional players, who don’t have the same scale and can’t offer such utility contracts and 24/7 service. Its scale allows FirstService to dominate the local mom and pop competition. It is consolidating a highly fragmented market, while generating significant Once the approved list of Weatherbie 50 is established, each portfolio manager creates his own high-conviction, diversified portfolios from these 50 stocks. We act independently of each other, because each of us has different experience and conviction level for each stock, which is reflected in the weightings. For example, FirstService is the top position in the overall portfolio because it is a high-conviction name in each of our sleeves. The weightings are not equal; the stock may represent 5% of George’s sleeve, 6% of Matt’s sleeve and 5.2% of Josh’s sleeve, but it’s a high-conviction name for all of us. Of course, we have certain risk parameters at the fund level. Generally, the largest position has to be 6% or lower, while the largest dynamic growth area exposure has to be 35% or lower. As long as we are within the risk parameters, each portfolio manager acts independently and with accountability. How do you combine diversification with concentration? The portfolio generally consists of 50 names and we believe that’s the right point to provide enough diversification without diluting returns. We achieve diversification through investing in various sectors of the economy, where we find growth and quality. The second layer of diversification is the analyst coverage of different areas. The third layer is at the portfolio manager level, where the fund is managed by three people. Our analysis concluded that our top high-conviction names actually outperform the rest of the portfolio by a significant margin. Therefore, we invest about 45% free cash for acquiring selected regional players. What is your portfolio construction process?
of our capital in the top 10 names and about 58% of our capital in the top 15 names. As a result, the portfolio has benefited from the outperformance of its best companies. Those are the dynamics between diversification and concentration and we believe that we have found the sweet range to be in. We are extremely picky
stock pickers in a huge investment universe. How has the fund evolved over the years?
Our investment process really hasn’t changed in 22 years, but there have been tweaks and enhancements. At the end of 2014, we undertook a detailed analysis of our past performance, which determined that cumulatively, as well as in three out of four years, we would have added alpha by investing more capital in the biggest names. We decided that we should deliberately and gradually invest morein the top names. The result was a higher conviction, better performing portfolio. The multi-dimensional diversification was another enhancement. We understand that we work in a competitive business and we have to get better over time; we can’t just rest on our laurels. Since 2015, we generally invest only in 50 names (versus 50 – 60 names previously) and further concentrate the capital in the top names. We also have backup analysts to support the primary analyst or to sponsor new ideas. The backup analyst acts as a second pair of eyes to independently evaluate the prospects of the top holdings and to make sure that we haven’t developed an institutional blindness and we are not missing a significant change What are the benchmark and the turnover of the fund? We are most often compared to the Russell 2500 Growth Index, because of the investment universe, but as active managers, we go very narrow as we concentrate only on the 50 best smaller cap growth companies in America. In the current environment, which is dominated by algorithmic trading platforms, there is a lot of short-term volatility. Our portfolio turnover is much lower than the turnover of the funds in our space, so we can take advantage of market volatility. Because we know our companies well, we have the conviction to invest for the longer term. What factors drive your buy and sell discipline? We have a valuation discipline, but it is no more than 20% of the total equation. About 80% of our process is focused on getting the company and its earnings growth right, because the earnings growth will deliver the stock price growth, if we pay a reasonable price. We are not GARP investors, but we are also not momentum investors, who would pay any price for high growth. We have a disciplined approach to valuation that results in an attractive PEG ratio. In terms of sell discipline, we will sell a stock if we acknowledge that the company doesn’t deliver the earnings growth that we expected. If we have made a mistake, we have to sell the stock and move on. The second reason to sell is valuation. Actually, current interest rates and inflation levels have produced an environment of expanding P/E ratios, which is a wonderful environment for growth stocks. We resisted the temptation to be overly precise in identifying target prices, because growth companies are dynamic,
their earnings are growing and therefore valuations are growing. The third and most common reason to sell is that we generally hold only 50 names, while our research generates new ideas on a regular basis. Every new idea has to earn its place in the portfolio and to replace the least attractive holding. Our discipline of owning only what we believe are the best 50 smaller cap companies pushes us to go deeper and drives the Weatherbie Way of investing. The fourth reason to sell is when the company has successfully grown and its market cap exceeds $15 billion. These stocks have to leave the portfolio so that we can stay true to our philosophy of smaller cap investing. At the time of initial purchase, the company should have less than $2.5 billion in market cap, but we allow our winners to run up to $15 billion. How do you define and manage risk? Risk and reward are always connected. Because we invest in high-growth companies that expand to new markets or develop new products, there is always risk. Sometimes they get elevated P/E ratios because other investors discover them. Then the risk is magnified because if the earnings slow down, the stock will underperform. At the portfolio level, we mitigate risk through several measures. One of them is diversification. We must be diversified among at least four of our six internal dynamic growth areas and generally no individual dynamic growth area can exceed 35%. Diversified business services is the only dynamic growth area close to 35% of the portfolio, but it represents a diversified group of companies by definition. The second risk control is the split between foundation and opportunity growth stocks. Over time, we have found these two groups of stocks tend to perform differently in different market cycles. Our valuation discipline is another risk control as we wouldn’t pay just any multiple for a high-momentum company. Next, we invest in what we believe are truly great smaller cap growth companies. These are companies that we have studied thoroughly and that have competitive moats, great management teams, adequate funding for growth and significant control over their own destiny. That’s why we have confidence in the ability of these companies to weather economic storms. Finally, our multi- manager approach to portfolio construction adds a significant amount of redundancy and downside protection. This structure is quite rare in our universe. Overall, the fundamental factors remain quality and growth. With intense research, multiple managers, diversification, monthly meetings and double coverage of top names, we build a safety net under outperformance.
Alger Weatherbie Specialized Growth Fund
Fred Alger Management, LLC
Sub-Advisor Weatherbie Capital, LLC Symbol ASMZX (Class Z) Address 360 Park Avenue South New York, NY 10010 Phone 800-992-3863 Website www.alger.com
Source: Company Documents
About Ticker Q&A Our research staff analyzes and selects funds based on their consistency in performance and durability of investment style. You can find more fund profiles and view our other publications on Ticker.com and TickerFunds.com
This article reprint, originally published by Tickerfunds.com on September 9, 2019, is considered sales literature for the Alger funds mentioned only and not for any other products shown. Please note that Tickerfunds.com 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, 2019, the Alger Weatherbie Specialized Growth Fund (the “Fund”) returned the following:
Average Annual Total Returns (%) (as of 6/30/19) YTD
1 Year 12.62
Class Z (Incepted 12/29/10)
Russell 2500 Growth Index
TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/19)
Z: 1.00% 0.99%
Fred Alger Management, LLC has contractually agreed to waive fees or to reimburse Fund expenses (excluding acquired fund fees and expenses, dividend expense on short sales, borrowing costs, interest, taxes, brokerage and extraordinary expenses) through February 28, 2021 to the extent necessary to limit the annual operating expenses of Class Z to 0.99% of the class’s average daily net assets. This expense reimbursement may only be amended or terminated prior to its expiration date by agreement between Fred Alger Management, LLC and the Fund’s Board of Trustees, and will terminate automatically in the event of termination of the Investment Advisory Agreement. Fred Alger Management, LLC may, during the first year of the expense reimbursement contract, recoup any expenses waived or reimbursed pursuant to the expense reimbursement contract 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 reimburse- ment and (ii) the recoupment after the repayment of the recoupment is taken into account. Only periods greater than 12 months are annualized. Prior to September 30, 2019, the Fund’s name was “Alger SMid Cap Focus Fund.” Prior to August 30, 2017, the Fund followed different investment strategies under the name “Alger SMid Cap Growth Fund” and before March 1, 2017 was managed by different portfolio managers. 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. 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. 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 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. Investing in companies of small and medium capitalizations involve the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity. 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. Foreign securities involve special risks including currency fluctuations, less liquidity, inef- ficient trading, political instability, and increased volatility. The Russell 2500® Growth Index measures the performance of the small to mid-cap growth segment of the U.S. equity universe. It includes those Russell 2500 companies with higher growth earning potential as defined by Russell’s leading style methodology. The Russell 2500 Growth Index is constructed to provide a comprehensive and unbiased barometer of the small to mid-cap growth 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. The performance data quoted represents past performance, which is not an indication or a guarantee of future results. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. As of June 30, 2019, the securities mentioned in this reprint represent the following as a percent of Alger’s assets under management: FirstService Corp. 0.41%. 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, LLC, Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.
Fred Alger & Company, LLC 360 Park Avenue South, New York, NY 10010 / 800.992.3863 / www.alger.com