Small Cap Focus Fund Receives Silver

Reprinted by permission of Morningstar, May 17, 2018

Alger Small Cap Focus Z AGOZX An upgrade to Silver.

Morningstar's Take AGOZX

expansion into related markets. These characteristics can make for attractive acquisition targets, and indeed the fund sees several takeouts each year. Zhang’s process courts considerable price risk as the firms she favors often have lofty valuations relative to their current earnings. On the other hand, their typically modest debt/capital levels lessen the likelihood of a blowup. Zhang won’t sell a name just because it hits a certain revenue or market-cap threshold. She will, however, trim positions once a stock comes within 10% of her price target and exit when her investment thesis no longer holds. Annual turnover has come down since Zhang overhauled the portfolio in 2015, notching 76% in 2016 and dropping to 45% in 2017, below the small-growth category average of 75%. Turnover will likely remain around this level or drop even lower. Amy Zhang crafts a best-ideas portfolio of roughly 40-50 stocks. Top positions typically take up 3%-5% of assets and are capped at 8%. That keeps security- specific risk in check to a degree, but with 30%-40% of assets in its top 10 holdings, the fund is among the more concentrated in the small-growth category. The fund stays rooted in cash-rich firms with competitive advantages that provide for continued growth, including expansion into other markets. Top holding Veeva Systems VEEV has benefited from businesses moving to cloud-based solutions, as it occupies a niche spot in the life sciences software industry. Such firms come at a cost, however. As of February 2018, the fund’s trailing P/E ratio was 51.1, more than double the Russell 2000 Growth Index’s 23.7. The fund’s heavy exposure to tech and healthcare stocks is notable, a characteristic shared with Zhang’s former charge. The two sectors dominate the portfolio, averaging around 80% of assets since Zhang took over, but even here, Zhang’s attention to

Zhang’s preference for cash-rich companies with several years of operating history has helped avoid stock blow-ups.

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Morningstar Rating

Morningstar Analyst Rating

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True to the fund’s moniker, Zhang crafts a concentrated portfolio of 40-50 stocks and keeps roughly a third of the fund’s assets in the top 10 positions. Though turnover was high in her early days, attributable in part to the management transition, she invests with a three- to five-year horizon, and turnover dropped to 45% in 2017. Results have been solid with Zhang at the helm, and through April 2018, the fund soundly beat its Russell 2000 Growth Index benchmark, placing in the category’s top decile. The fund isn’t without risks, however. In addition to its sector concentration, it courts considerable price risks relative to peers, as Zhang’s preferred companies don’t come cheap. Indeed, the fund boasts some of the category’s highest trailing price ratios, though below-average debt levels provide some solace. Zhang’s strong start hasn’t gone unnoticed, as investors have begun pouring into the fund. Encouragingly, fees have fallen as the fund has grown and now provide an edge relative to peers. Investors seeking small-growth exposure should consider this option while it’s still open. Process Pillar ∞ Positive | Christopher Franz. CFA 05/15/2018 The fund’s revenue-centric, benchmark-agnostic approach earns a Positive Process Pillar rating. Rather than defining small companies primarily by market capitalization, which can be unduly influenced by investor expectations, manager Amy Zhang focuses on publicly traded firms with operating revenues of $500 million or less. She looks for those with healthy balance sheets, durable business models, and good prospects for long-term growth because their differentiated products or services satisfy emerging needs and enable

Morningstar Pillars Process

∞ Positive ∞ Positive ∞ Positive ¶ Neutral ∞ Positive

Performance

People Parent

Price

Role In Portfolio Supporting Fund Performance AGOZX Year

Total Return (%)

+/- Category

YTD 2017 2016 2015 2014

10.41 29.27

7.75 7.77 -2.72 4.70 -0.28

8.48 2.28 2.16

Datathrough4-30-18

5-15-18 | by Christopher Franz. CFA

Increased confidence in Alger Small Cap Focus manager Amy Zhang and her supporting team and strong results since her 2015 start merit an upgrade in the fund’s Morningstar Analyst Rating to Silver from Bronze. Though Zhang took over in February 2015, she’s no stranger to small caps. Prior to joining Alger, she was a key contributor at Gold-rated Brown Capital Management Small Company BCSIX, helping to amass one of the small-growth Morningstar Category’s best risk-adjusted records over her 12- plus year tenure as comanager. Alongside four dedicated analysts, Zhang plies a similar approach here, focusing on firms with operating revenues of $500 million or less whose differentiated products or services satisfy emerging needs. This distinct, revenue-centric approach leads to a portfolio full of healthcare and technology names, comprising nearly 80% of the fund as of March 2018. Though this positioning presents obvious sector-specific risk,

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