Investor's Business Daily
APRIL 10, 2017
Blue Chip Tech Stocks Help Fuel This Red-Hot Fund
BY PAUL KATZEFF
To beat the stock market and mutual fund peers, having the right stocks isn’t enough. It’s having them at the right time that counts. And Alger Spectra Fund (SPECX) has done that in spades in the past 10 years and is doing so again this year. The fund, managed by Patrick Kelly since 2004 and Ankur Crawford since 2015, has cranked out an average annual gain of 10.55% in the 10 years since April 1, 2007, vs. 7.71% for its large-cap growth peers tracked by Morningstar Inc. and 7.51% for the S&P 500. This year the $5.3 billion fund has raced ahead 11.04% vs. peers’ 8.62% and the broad stock market’s 6.07% gains. It’s doing that thanks in large part to the double-digit gains notched by nearly 40% of its publicly traded stocks so far in 2017. Blue chip stocks, including a bevy of tech beauties, are a big part of Spectra’s story right now. Top-10 holdings Amazon.com (AMZN), Apple (AAPL), Facebook (FB), Visa (V) and Broadcom (AVGO) were all double-digit climb- ers, with returns ranging from Visa’s 14% to Apple’s nearly 25%. Other big gainers for the fund included Adobe Systems (ADBE), up 26%; Alibaba Group (BABA), whose ADRs were up 24%; and S&P Global (SPGI), up 21%. Through Monday afternoon, Amazon, Facebook, Broadcom and Alibaba were ad- vancing yet again. The $4.78-billion market cap Cavium (CAVM), punching way above its weight class, was also rising — again. So was United Rentals (URI). Each was pushing back up near all-time high levels. Most of those stock market winners can also be found in Spectra’s peers and the major stock indexes like the Nasdaq Composite and the S&P 500. But it’s the managers’ handling of the fund’s investment process that has made the performance difference. Lead managers Kelly and Crawford, who ad- vanced to her manager role after joining Alger as a research assistant in 2004, have notched their gains mainly by sticking to their invest- ment approach, even when that means side- stepping sectors that have benefited from the “Trump bump” stock market rally. The crux of their approach is to seek growth stocks that are undergoing what they call “posi- tive dynamic change” — high-unit-volume growth and positive life-cycle change.
Alger Spectra’s Ankur Crawford and Patrick Kelly favor growth stocks undergoing a “positive dynamic change.” Recent holdings include, Apple, Amazon and Facebook. (Tina Fineberg/IBD)
U.S. business and GDP growth. With a lot of companies we’ve invested in, we’re staying the course. IBD: Across the board? Crawford: The procyclical bias favoring mate- rials is outside how we invest. With materials, we don’t see a positive life-cycle change per se vs. a cycle to be played. In banks, however, there is much change. We expect they will benefit from lower regulation. We didn’t take our industrials positions up dramatically because we worried about the very thing you’re talking about, and industrials have given up some gains on those fears. How- ever, in technology there are secular growth drivers that, regardless of policy, we expect will play out. IBD: The tech sector is your largest weighting. Why? Kelly: We continue to be big on trends in the internet, software and semiconductors. We believe tech will be a big beneficiary of trends in the mobile internet, artificial intelligence, cloud computing and Big Data. IBD: What are some examples?
Kelly, 42 years old, and 41-year-old Craw- ford talked about their strategy and holdings with IBD from their offices in New York City. IBD: What does the positive-life-cycle-change part of your strategy mean? Kelly: In a positive life-cycle change, we’re looking for earnings acceleration and multiple expansion driven by the positive change. IBD: How much of your portfolio consists of life-cycle change, how much consists of high- unit-volume growth? Crawford: About 10% of the portfolio is both, and the remainder is split half and half. IBD: Since the election, a lot of money manag- ers have focused on playing sectors that they believe will benefit from Trump initiatives and a Republican Congress. However, with the failure to repeal or reform ObamaCare, many investors are concerned about the outlook for those policy moves. How are you playing this? Kelly: You highlighted one of the big market risks. Can the administration deliver on its promises? We’re still optimistic that admin- istration policies will be more supportive of
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Crawford: It’s a transformative company that single-handedly changes the way we consume content. We are concerned that their free-cash- flow and earnings potential resides in the out years (in the future). They’re able to get lever- age only as they’ve seeded the global market. We see additional international penetration; the ability to increase pricing from the current offering of $10 a month in the U.S., which we believe is greatly underpriced for the value; and their ability to monetize their user base using creative advertising methods. We believe they can double their user base and revenues in the next five years. IBD: Broadcom has accelerated EPS growth for four quarters in a row. Are you comfortable they can keep this up? Crawford: They’re one of the best examples of life-cycle change. They have a visionary CEO (Hock Tan), who via acquisitions and organic growth has driven earnings up ninefold over the last seven years. And we believe he’s not done. Broadcom should continue to see further earnings accretion and now capital return to shareholders because it’s generating $6.5 bil- lion to $7 billion in free cash flow, which is about 30% of its revenue in free cash flow. IBD: Morgan Stanley has pulled back from its March high on investors’ fears that corporate tax reform and lowering banks’ regulatory bur- den is not the slam dunk many thought they would be. What’s your thesis? Kelly: They’ve undergone significant change. Wealth management was only 5% of their busi- ness in 2006. Now it’s roughly 50%. We believe that shift to a higher margin, less-capital-inten- sive business can drive return-on-equity ex- pansion and multiple expansion. And financials in general should still benefit from regulatory relief and higher interest rates. IBD: Which of your strategic drivers does Adobe represent? Crawford: It’s both a lifecycle-change and a high-unit-volume-growth company. And it is dominant in its market, and should have sus- tainable midteens revenue growth for the next three to five years, with over 20% earnings growth in that period. Digital advertising is the high-unit-volume- growth part of their business. They provide a platform that enables customers to deploy digi- tal advertising. The life-cycle change is in the creative prod- ucts part of the company, which has undergone a fast transition and is continuing to grow their total available market, as their products are ad- opted more broadly. And Adobe is adding more solutions, such as Fotolio, which is competitive with Shutterstock. It’s a site where photographers can display their
Kelly: Amazon’s Alexa (a voice-capable interac- tive personal assistant) is an AI device. It will prove disruptive to the retail sector. Apple is a life-cycle change company with a growing services business and an upcoming product-cycle services that should be an anchor that mutes the cyclicality of any product cycle. IBD: Is there also a potential Trump Trade boost for, say, Apple? Kelly: If tax repatriation takes place, Apple has $100 billion sitting (outside the U.S.) that would make them a beneficiary. It would either allow them to do a pretty significant buyback or, for companies that are legacy companies, it would give them the ability to positively life-cycle change. They can buy assets that let them turn their big ship around. IBD: Let me ask about some individual com- panies as of your latest disclosure. Do you like Alibaba because of any one part or do you like it because of its many parts together? Kelly: Our thesis is that Alibaba is one of the most dominant companies in the world. It’s the dominant e-commerce platform in China. They also have leading positions in video, payments, logistics and cloud computing in China. We continue to believe platforms such as Alibaba and Amazon are extremely disruptive and un- derappreciated by the market. IBD: What has enabled earnings per share for Cavium (CAVM) to grow again after four quar- ters of declines? Crawford: For us, this is a classic unit-volume- growth story. They’re a semiconductor company that will benefit from the upcoming 5G infra- structure upgrade. There will be a need to build faster data centers and to move to ARM-based servers (which are a category of reduced instruc- tion set computing, or RISC, architectures for computer chips, which cut costs, heat and power use). Cavium has a complete portfolio of infra- structure IT to address the next generation of networks. These product cycles will drive con- tent growth and market-share gains, which we expect will drive significant revenue and earn- ings accretion over the next three years. IBD: Any concern about Facebook’s EPS growth slowing for two quarters in a row? Kelly: Internet advertising will experience rap- id growth. And we expect Facebook to continue to take market share. It’s also in the early stages of monetizing Instagram and its rapidly grow- ing 600-million user base. Facebook has other medium- to long-term monetization levers, in- cludingMessenger, WhatsApp and their Oculus Rift platform. IBD: Netflix ’s (NFLX) quarterly EPS growth has accelerated. Any clouds on the horizon?
images and content-creator customers can use their images. It’s a subscription type business, which allows for increased average selling price per customer. IBD: United Rentals (URI) has traded side- ways near its all-time high since its January earnings report. Do you still like it? Kelly: It’s one of the leading equipment rental companies in the U.S. Postelection, investors expected it to benefit from construction, from corporate tax reform and improving GDP growth. It (stalled) because there is uncertainty about the prospects for an infrastructure bill. If one passes, United would be a big beneficiary. Trump is also pro-energy, so a buildout of pipe- lines should benefit United. IBD: S&P Global (SPGI) has mostly gone side- ways since Congress failed to repeal or reform ObamaCare. Is that a problem for S&P? Crawford: It’s not a problem yet. S&P is anoth- er market dominant company. It is one of effec- tively two players in the ratings business, where they enjoy secular growth in debt issuance due to global economic growth and regulator con- straints on banks. Combined with their infor- mation services business and their index busi- ness, 70% of their business is recurring. Adding to that, they are pruning their port- folio and using the proceeds to buy back shares. IBD: The fund’s outperformance in the past 10 years got a boost from the fund’s 56.52% gain in 2009. What worked so well for the fund that year? Kelly: We follow our philosophy and process in all markets to deliver strong long-term results for our clients. Looking at one year is not the lens we use to view the performance of the fund... (On the other hand, we) have had consistently strong performance over any three-year rolling period over the past 10 years. I think that is the better metric to focus on than any one year. IBD: What’s your process for building positions in a stock? Kelly: Building positions depends on the stock and a variety of other factors. We continually assess risk-reward and look to rotate money into the names that we think have the most fa- vorable risk-reward. IBD: You are active managers. Some people say active management at least in mutual funds is doomed. What do you think? Kelly: We’re in a highly competitive market. You need to be able to drive good performance over a multiple-year period. We’ve been able to do that. That will continue to be our challenge going forward. We remain confident in our team and philosophy and process.
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This article reprint, originally published by Investor’s Business Daily onApril 10, 2017, is considered sales literature for the Alger funds mentioned only and not for any other products shown. Please note that Investor’s Business Daily is an independent publication and the IBD performance ratings reflected in the article do not represent the experience of any individual investor.
For the period ending March 31, 2017, the Alger Spectra Fund (SPECX) returned the following:
Average Annual Total Returns (%) (as of 3/31/17) YTD
Class A (Incepted 7/28/69) Without Sales Charge
11.04 5.23 8.63
12.92 11.70 13.22
10.55 9.95 9.04
With Sales Charge
Russell Growth 3000 Index
On 9/24/08,the Fund’s name was changed fromSpectra Fund toAlger Spectra Fund,and the Fund’s Class N shares were redesignated as ClassAshares.The Fund operated as a closed end fund from 8/23/78 to 2/12/96. The calculation of total return during that time assumes dividends were reinvested at market value. Had dividends not been reinvested, per- formance would have been lower. Performance of the Fund’s Class C Shares prior to 9/24/08 reflects the performance of the Fund’s Class A Shares, as adjusted with currently applicable sales charges and operating expenses, which differ from historical charges and expenses. Only periods greater than 12 months are annualized. The first full calendar year which Fred Alger Management, Inc. managed the Spectra Class A portfolio was 1975. Risk Disclosures: Investing in the stock market involves gains and losses and may not be suitable for all investors. 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. Growth stocks tend to be more volatile than other stocks. Their prices tend to be higher in relation to earnings and may be more sensitive to market, political, and economic developments. Investing in companies of all capitalizations involves the risk that smaller, newer issuers may have limited product lines or financial resources, or lack of management depth. Companies of small and medium size capitalizations are subject to greater risk than stocks of larger, more established companies owing to such factors as limited liquidity, inexperienced management, and limited financial resources. Foreign investing involves special risks including currency risk and risks related to political, social, or economic conditions. The strategy can leverage, that is, borrow money to buy additional securities. By borrowing money, the strategy has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid on the money borrowed. Short selling (or “selling short”) is a technique used by investors who try to profit from the falling price of a stock. It is the act of borrowing a security from a broker and selling it, with the understanding that it must later be bought back and returned to the broker. In order to engage in a short sale, the strategy arranges with a broker to borrow the security being sold short. In order to close out its short position, the strategy will replace the security by purchasing the security at the price prevailing at the time of replacement. The strategy will incur a loss if the price of the security sold short has increased since the time of the short sale and may experience a gain if the price has decreased since the short sale. There are additional risks when investing in an active investment strategy, such as increased short-term trading, additional transaction costs and potentially increased taxes that a shareholder may pay, which can lower the actual return on an investment. 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. Russell 3000® Growth is an unmanaged index of common stocks designed to measure the performance of the 3000 largest U.S. companies based on the total market capitaliza- tion, which represents 99% of the U.S. equity market. The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market without regard to company size. 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. As of 3/31/17, the securities mentioned in this reprint represented the following as a percentage of Alger Spectra Fund assets: Apple 6.65%; Amazon 6.11%; Facebook 4.87%; Visa 3.82%; Broadcom 2.24%; Adobe 1.12%; Alibaba 1.05%; Morgan Stanley 0.62%; Netflix 0.53%; Cavium 0.42%; S&P Global 0.30%; United Rentals 0.23%. 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 perfor- mance data, visit www.alger.com, call (800) 992-3863 or consult your financial advisor. Read the prospectus and sum- mary prospectus carefully before investing. Distributor: Fred Alger & Company, Incorporated. Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE. A: 1.31% 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. For performance data current to the most recent month-end, visit us at www.alger.com or call (800) 992-3863. Performance figures assume all distributions are reinvested. Returns after the maximum sales charge reflect a front-end sales charge on Class A Shares of 5.25%. TotalAnnual Operating Expenses by Class (Prospectus Dated 2/28/17)
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Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / 800.992.3863 / www.alger.com
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