Links To China Helped This Top Fund Early in Coronavirus Pandemic
VOL. 37, NO.8
W W W . I N V E S T O R S . C O M
WEEK OF JUNE 1, 2020
FUNDS & PERSONAL FINANCE
MUTUAL FUND PROF I LE
Links To China Helped This Top Fund Early In Coronavirus Pandemic
Alger Weatherbie Portfolio Managers made buys, sells before many investors foresaw diease's impact.
vices. Nevro is a medical device maker. Progyny is a fertility ser- vices business. The fund also trimmed its position in Wayfair W , an e-com- merce company that sells furni- ture and home goods, "because more than half of its goods were sourced from China," Dai said. Those moves reflect the flex- ibility that help makes this one of the best mutual funds. "We differ from our traditional peers," Dai said, "in that we not only hunt in the technology and health care spaces for ideas. We also hunt in more mundane in- dustries." Two of those nonexotic in- dustries are waste management and residential real estate ser- vices. That has led the fund to such diverse holdings as Casella Waste Systems CWST and First- Service FSV . For its buys, the fund's co- managers think long-term, not like in-and-out speculators. "We evaluate each company as if we were outside buyers who want to own a business," co-manager Josh Bennett said. The fund targets small- and midcap stocks. Initial buys are $300 million in market capital- ization to no larger than $2.5 billion. The fund's third manager is MatthewWeatherbie, co-found- er, CEO and co-chief investment officer of Weatherbie Capital. Weatherbie is a subsidiary of Al- ger Associates. Amix of quantitative and qual- itative criteria also help make this one of the best mutual funds.
Alger Weatherbie Spec. Gr Prt I-2
Sector weightings as of
% of stock assets
% of S&P 500
Basic materials Consumer cyclical Financial services
0.00 2.10% 5.85 10.26 6.15 13.58
BY PAUL KATZEFF INVESTOR’S BUSINESS DAILY
Lots of mutual fund managers bought stocks when share prices dropped during the coronavirus stock market correction. Alger Weatherbie Specialized Growth Portfolio AAMOX , one of the indus- try's best mutual funds, got a head start on many. Co-manager George Dai, born in China, heard from relatives and friends in his birth country that a new disease was arising. The disease was severe and would likely be disruptive, they told him. "Starting in early February, we realized that this coronavi- rus would be more serious than Wall Street appreciated," Dai said. "Thirty years ago I came from China. I still have family and friends in China. Some fol- lowed the coronavirus situation closely. They said the situation was far worse than people be- lieved." As a result, the still-small $2.04 million fund reviewed its portfolio and made offensive as well as defensive moves. The fund added to its stakes in high- conviction holdings, including Epam Systems EPAM , Nevro NVRO and Progyny PGNY . Epam provides software product development and digi- tal platform engineering ser-
Economically sensitive 45.70 Communication services 0.00 10.84 Energy 0.48 3.05 Industrials 12.43 8.40 Technology 32.79 22.36 Defensive 36.20 Consumer defensive 9.05 7.75 Health care 27.15 15.49 Utilities 0.00 3.27
Max. front load: None Expenses: 1.05% Symbol:
2019: 38.31% 3-yr. avg.: 20.28% YTD: 9.52% 5-yr. avg.: 14.13% 10-yr. avg.: 14.56% Total returns as of 5/26/20
Alger Weatherbie Spec. Gr Prt I-2 Large-cap growth funds S&P 500
Total returns as of 5/26/20
11 14 17 20%
2 5 8
Source: Morningstar Direct
Among their quantitative criteria, the managers look for stocks whose earnings are growing at least at a high teens rate and preferably at least 20% annually. "We are true growth investors, not GARP investors," Bennett said, referring to the acronym for the growth-at- a-reasonable-price approach to investing. GARP investors tend to be more conservative about how much they'll pay for a stock, preferring to pay lower valuations for their stocks. Another quantitative criteria they look at is debt. "We're OK with debt, but we want compa-
nies that use debt as a tool, not as a crutch," Bennett said. "If they have debt, theymust have the free cash flow to support it. Theymust be able to pay it down in three to five years, not 10 years." On the qualitative side, the fund manager want companies that have outgrown what Ben- nett calls the perils of infancy. Second, they prefer com- panies whose management owns a stake in the business or whose compensation is tied to performance. That way, company managers' priorities and financial interests overlap with their shareholders'.
WEEK OF JUNE 1, 2020
after Chegg announced first- quarter earnings of 22 cents per share in May. That was up 47% from the year-earlier period. Revenue was up 35%. Chegg offers online textbook rentals, both physical and digi- tal. Its Chegg Services line of- fers subscription homework help and online tutoring. The company also offers products and services that help students transition from high school to college and into their career. "Chegg is the leader in its field," Dai said. Tens of millions of students in the U.S. are cus- tomers, even more abroad. "Its services cannot be easily deliv- ered by on-campus tutors and professors because of time and access issues. So Chegg has been growing its top and bottom lines at 20% to 30% to 40% since we owned it," Dai said. The coronavirus pandemic makes students more depen- dent on Chegg. "Access to pro- fessors and on-campus tutors is even more limited now, so more students sign up for Chegg's services." Trade Desk TTD is another stock that has helped make this one of the best mutual funds. Trade Desk runs an online
"Lastly, we're looking for companies with sustainable competitive advantages," Ben- nett said. "We want companies that not only have a protective moat around the business, but a moat that's getting wider." Award Winner Its approach has paid off for this tiny fund. The fund is a 2020 IBD Best Mutual Funds Awards winner. The fund topped the S&P 500 in calendar 2019 as well as over the three, five and 10 years ended Dec. 31 on an average-annual- return basis. During this coronavirus-chal- lenged year going into Tuesday, the fund is up 8.99% vs. a 7.77% setback for the S&P 500. The fund's large-cap growth rivals tracked by Morningstar Direct average a 2.71% decline. Chegg CHGG , which the fund has owned since early 2017, has helped make this one of the best mutual funds. "We started to follow the company at its IPO (in 2013)," Dai said. "The legacy side of the business was textbook rental. But today it is an educational service solution provider." Share price gapped up 32%
platform that is used by adver- tisers and agencies to plan, bud- get, launch, report and analyze advertising campaigns. "When we first bought (Trade Desk), its competitive position was (equal) with DoubleClick, a subsidiary of Google GOOGL ," Dai said. But in the last two years, regulatory pressure prompted Google to alter its approach to the advertising service platform space, Dai says. In contrast, Trade Desk continued to invest in innovation in the ad-support platform space and became big- ger, Dai says. Even if a coronavirus pan- demic recession continues and deepens, Dai predicts Trade Desk will grow faster than the rest of its industry. Trade Desk also invested in connected TV (CTV), as stream- ing TV is known. Revenue for CTVwas growing at more than a 100% annualized rate pre-coro- navirus pandemic. That slowed to a 20% annualized pace early in the pandemic correction, then rebounded to 40% in early May. CTV "will gain more mar- ket share coming out the other side" of the pandemic, Dai says. Ollie's Bargain Outlet OLLI also helped make this one of the
best mutual funds. Shares have soared 60% above where they stood before the coronavirus stock market correction. Not only does Ollie's appeal to the bargain hunter in any consumer, the discount chain also benefits from the volatil- ity roiling the brick-and-mor- tar retail space. "They benefit from the turning of the retail base," Bennett said. "When Toys R Us went bankrupt, Ol- lie's was at the front of the line getting deals on discount toys, selling toys at their own stores at 30% to 40% or higher dis- counts." Ollie's also offers merchan- dise that appeals to a wide range of consumers. "Their stores are in areas that border blue- and white-collar areas. They sell es- sentials to blue-collar consum- ers. They sell high-end goods like Cuisinarts that may be an odd color for sweetheart prices to white-collar consumers." If you can't buy shares of this fund through your retire- ment plan, consider its sibling portfolio, $733.8 million Al- ger Weatherbie Specialized Growth Fund ASIMX , which uses the same structure, allocation and strategy.
Posted with permission from Investor’s Business Daily, Inc. Copyright © 2020 All rights reserved. C107397 Reprinted by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com.
This article reprint, originally published by Investor’s Business Daily on May 29, 2020, 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 publica- tion and the performance and ratings cited in the article do not represent the experience of any individual investor. For the period ending March 31, 2020, the Alger Weatherbie Specialized Growth Fund (the “Fund”) returned the following:
Average Annual Total Returns (%) (as of 3/31/20) Ticker
Class I (Incepted 8/6/07)
Class Z (Incepted 12/29/10)
Class I-2 (Incepted 1/2/08)
(Since 8/6/07) 8.07 (Since 12/29/10) 8.88 (Since 1/2/08) 7.41
Russell 2500 Growth Index
TotalAnnual Operating Expenses by Class (Prospectus Dated 3/1/20)
Without Waiver: I: 1.26% Z: 0.97% I-2: 10.84% With Waiver: — 0.97% 1.05%
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 (Class Z) and through April 30, 2021 (Class I-2) to the extent necessary to limit the annual operating expenses of Class Z to 0.99% and Class I-2 to 1.05% of the class’ 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. Only periods greater than 12 months are annualized. Performance of the Class I shares prior to August 6, 2007 are those of the Fund’s Class A shares with an inception date of May 8, 2002. Performance has been adjusted to remove the front-end sales charge imposed by Class A shares. Class I shares do not impose any sales charges. If this charge was reflected, annual returns for the Class I shares of the Fund would be lower. Performance figures prior to August 6, 2007 have not been adjusted to reflect the operating expenses of Class I shares. 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. 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, including the potential loss of principal. Growth stocks may 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 and Emerging Markets involve special risks including currency fluctuations, inefficient trading, political and economic instability, and increased volatility. Total return for Class I-2 does not include deductions at the Fund or contract level for cost of insurance charges, premium load, administrative charges, mortality, and expense risk charges or other charges that may be incurred under the variable annuity contract, variable life insurance plan, or retirement plan for which the Portfolio serves as an underlying investment vehicle. Please refer to the variable insurance product or retirement plan disclosure documents for any additional applicable expenses. 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. Russell 2500® Growth Index performance does not reflect deductions for fees or expenses. Investors cannot invest directly in any index. Index performance does not reflect deductions for 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. The following positions represented the noted percentages of assets in the Alger Weatherbie Specialized Growth Portfolio as of 3/31/20: Chegg, Inc., 5.92%; Nevro Corp., 5.55%; FirstService Corp., 5.54%; EPAM Systems, Inc., 5.03%; Casella Waste Systems, Inc., 4.65%; Progyny, Inc., 2.71%; Ollie’s Bargain Outlet Holdings, Inc., 2.60%; Trade Desk, Inc., 2.35%; Wayfair, Inc., 0.37%; and Alphabet, Inc., 0%. Investor’s Business Daily’s 2020 Best Mutual Funds Awards winners have beaten their benchmark index in the past one, three, five and 10 years ended December 31, 2020 and are at least ten years old. Before investing, carefully consider the Fund’s investment objective, risks, charges, and expenses. For a prospectus and sum- mary 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
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