Small Cap Focus Fund Receives Silver

Reprinted by permission of Morningstar, May 17, 2018

Kelly's Alger Capital Appreciation ALARX has also excelled, but the firm has had less success running other strategies. That could change, though. Proven small-cap manager Amy Zhang joined in early 2015, and Alger acquired Weatherbie Capital in early 2017 for its small/mid-cap growth expertise. Both Zhang and the Weatherbie team build benchmark-agnostic portfolios of about 50 stocks. These additions are promising, but Alger still has room for improvement. Fees are above average, and overall manager investment is weak. The firm receives a Neutral Parent Pillar rating. Price Pillar ∞ Positive | Christopher Franz. CFA 05/15/2018 This fund’s fees have dropped as it’s grown and now offer an advantage relative to small-cap peers, meriting a Positive Price rating. Manager Amy Zhang’s solid start hasn’t gone unnoticed. The fund has received steady inflows, including more than $150 million in 2018 through April. Fees have dropped as well and rank below average relative to comparably sold small-cap peers for most share classes. The A shares offer the best relative value; their 1.20% levy currently ranks in the cheapest quintile of small-cap, front-load funds. Assets have increasingly shifted toward the institutional Z share class; at 0.90%, it falls below the no-load median of 0.99%. A fee waiver on most share classes keeps the fund’s feesmore competitive than they would otherwise be, but Alger has indicated a willingness to keep costs competitive.

Prior to joining Alger and taking over this fund in mid- February 2015, Amy Zhang spent 12 years at Baltimore-based Brown Capital Management. There she helped Gold-rated Brown Capital Management Small Company BCSIX to one of the best records in the small-growth category, handily beating the Russell 2000 Growth Index with less risk. Zhang’s industry experience dates to the late 1990s, where she had a brief stint in credit derivatives before working as a global equity analyst at Templeton from 1998 to mid-1999 and then as a manager and analyst at Epsilon until she joined Brown in late 2002. While her experience is noteworthy, her personal investment in the fund is low, between $100,001 and $500,000. Zhang’s support staff has grown since she took over the fund and totals four dedicated analysts. Nidhi Chadda, a generalist with a background in consumer stocks, joined Alger in 2014 and began supporting Zhang in early 2016. Healthcare-focused Tom DeBourcy joined Zhang’s group in mid-2016 after joining Alger the year before. Zhang added software specialist Kyle Chen in 2016 and more recently research associate Caleb Huang from an internal training program. Though the supporting group’s tenure at Alger is short, they average 11 years’ industry experience. Parent Pillar ¶ Neutral | Christopher Franz. CFA 06/09/2017 Established in 1964 as a growth shop, privately held Fred Alger Management has overcome a great deal since the early 2000s. Its World Trade Center headquarters were decimated on 9/11, claiming the lives of most of the firm's investment staff, including David Alger, the founder's brother and manager of Alger Spectra SPECX, which Smart Money magazine praised as the most successful mutual fund of the 1990s. Alumni returned to help rebuild the firm, but soon afterward it was implicated in the market- timing and late-trading scandal of 2003. Alger settled those charges by 2007. With a bolstered compliance department, it has had a clean regulatory record since. Alger Spectra has returned to prominence, as it has consistently been a top-performing large-cap growth fund since manager Patrick Kelly took the helm in September 2004.

business fundamentals shows. She’s cautious about buying biotech firms, for example, because of their binary outcomes. The few biotech names she does own, such as Bio-Techne TECH and Repligen RGEN, feature low debt levels and generate positive cash flow. Though the fund does own some larger-cap stocks, such as mid-cap merchant platform Shopify SHOP, its average market cap is in line with the category. Performance Pillar ∞ Positive | Christopher Franz. CFA 05/15/2018 Manager Amy Zhang’s solid start, on both a total return and risk-adjusted basis, earns the fund a Positive Performance rating. Zhang took over in mid-February 2015, and through April 2018 the fund has returned nearly 15% annualized versus 10% for both the Russell 2000 Growth Index and small-growth category average. Risk-adjusted, the fund’s performance is equally strong; its Sharpe and Sortino ratios are comfortably ahead of the index and category average. These solid returns don’t come without risk, however. The fund’s massive healthcare and tech overweightings leave it prone to big swings in short-term performance whenever stocks in those sectors soar or sell off, evident in the fund’s bottom-quintile result in the sharp equity market correction from late December 2015 through mid-February 2016. Over the long haul, stock-picking should drive results here, as it did in Zhang’s 12-year tenure at Brown Capital Management Small Company BCSIX. That was the case in this fund’s 2017 result, where stock picks within Zhang’s favored tech sector (alongside the notable healthcare overweighting) led to a sizable gain over the fund’s bogy and average peer. Sector-specific and price risks notwithstanding, Zhang helped post superior results while keeping volatility in check at her former charge and has thus far demonstrated the same ability here.

People Pillar ∞ Positive | Christopher Franz. CFA 05/15/2018 A proven manager with extensive expertise in small caps earns the fund a Positive People Pillar rating.

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