Portfolio Insights: Alger Weatherbie Specialized Growth


George Dai: Yes, in our view, valuation is a dynamic process especially in the smaller cap growth area. Some of our companies have earnings and then some of them have revenues that are losing money and some of them are even pre-revenue. We used a variety of methodology to measure the intrinsic value of our investments. And valuation is an important piece of the puzzle that we look at. Now having said that, it is only 15 to 20% of the total consideration. The more important aspects are the quality of the business, the growth potential, competitive advantage and some other qualitative and quantitative measurements. We have noticed that the pockets of the markets such as in certain tech names have seen pretty high valuations. In which case we have already banked the profit. Importantly we continue to find what we believe are very attractive investment ideas in our part of the land due to the heterogeneity of our hunting grounds and the lack of adequate sell side coverage. I mean, for example, when we started owning Chegg, which is the story I just talked about, very few people had heard of it. We can more effectively control the valuation at the entry point meaning at the purchase. And the Street may pile in and drive up the valuation. Along the way our clients may benefit. Now when the valuation gets overly excessive we take profit and go to look for the next best ideas, for example the ones we talked about and The Trade Desk is another good example. Tyler Foster: Another topic I wanted to ask you about is the natural and ongoing difference in results between growth and value. I think this is maybe there is heightened attention on this subject right now. With growth generally outperforming for a number of years and many people are expecting a reversion to the mean. I think there's a large swath of investors out there who have been strong believers in value investing and it's worked really well for them over a number of decades. And meanwhile, Alger's Director of Market Strategy, Brad Neuman, has spoken and written about several reasons, both structural and fundamental, why growth may actually continue to outperform. Could you share your personal view and thoughts on this growth versus value question?

George Dai: This is actually not only an investment question but also at a high level, a philosophical question. Our belief is eventually, at the end of the day, a company's market cap really depends on how much value the company provides to the society. Highly innovative companies like the growth companies we own add a lot of value. They define the future, for example, they may create the next wonderful medicine that can cure certain deadly diseases or make people feel better and make them live longer. In technology they make your life and your work much more efficiently and more pleasurable. And therefore we believe they have the potential to outperform because they are the future. Also, as Brad Neuman shared earlier this week in his research, the most innovative companies outperformed by about 6% per year in the last decade. So these are growth companies. While the least innovative companies have underperformed by 3% per year during this same period. We continue to like growth companies because we believe they represent the future because they add value to society. A lot more value to the society than the ill-defined value companies here. Tyler Foster: Yes, at Alger we've often spoken about Positive Dynamic Change and think to say it differently, the companies we're investing in are the beneficiaries of change and many of the traditional value companies may be victims of change.

Speaker Question: How long do we think small caps are going to outperform large cap? In terms of a baseball game analogy, what inning would we be in?

George Dai: Ok. Thank you for the question. We believe that smaller cap companies actually are as dynamic and often times more dynamic than some of the larger companies. So our time horizon is really multiple years or multiple decades.

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