Finding Quality Growth
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
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