Alger Small Cap Focus Fund Morningstar Analyst Rating
Inspired by Change, Driven by Growth.
Reprinted by permission of Morningstar, Jun. 22, 2020
Alger Small Cap Focus Z AGOZX A winner in this manager's hands.
Morningstar's Take AGOZX
services. She then looks for growing firms with healthy balance sheets, durable business models, and promising growth potential. From there, she is picky, building a portfolio of about 50 holdings. The approach is not without risks. Zhang's interest in fast-growing, competitively advantaged companies typically leads to tech and healthcare stocks dominating her portfolio. Although stocks of growing companies are often in demand, Zhang doesn't shy away from pricey names--thus, her portfolio's average valuation metrics, such as price/earnings, regularly look inflated. But Zhang has managed these risks well. Her strategy sports an impressive reward/risk profile. From her February 2015 start through March 2020, the Z share class gained 11.9% annualized. That blew past the typical small-growth Morningstar Category peer's 3.3%. The Russell 2500 Growth Index, which is a good comparison given this portfolio's mix of small- and mid-cap companies, rose 4.6%. The strategy wasn't much more volatile than its peers or the index during that period, and its tendency to outperform in rising markets and hold up better in downturns is a recipe for long- term success. With Zhang in charge, this is a strong small-growth offering. High | Tony Thomas 04/28/2020 This differentiated, well-executed approach earns a Process rating upgrade to High from Above Average. Unlike many strategies that define small companies by market capitalization, manager Amy Zhang looks for firms with operating revenues of $500 million or less. She modeled her approach on the proven method used at Brown Capital Management Small Company BCSIX, where she was a comanager from 2002 to 2015. Using operating revenues helps Zhang and her team target firms with viable products or services. Zhang Process Pillar
also prefers firms with healthy balance sheets, durable business models, and attractive long-term growth prospects--as well as founder CEOs or management teams capable of delivering that growth. Zhang then builds a focused portfolio of about 50 holdings. Her penchant for fast growers and strong competitive positions regularly leads her to tech and healthcare stocks, as do themes such as the rising need for animal diagnostics. Caps on individual position sizes and industry exposure--no more than 8% and 33% of assets each, respectively--help moderate concentration risk. Zhang will let winners ride, giving the portfolio a mix of small- and mid-cap companies and making the Russell 2500 Growth Index a better comparison than the Russell 2000 Growth prospectus benchmark. Amy Zhang's preferences for high-growth, competitively advantaged firms often lead her to tech and healthcare stocks. The two sectors held 82% of the January 2020 portfolio's assets--about typical for Zhang's five-year tenure here. By contrast, those areas made up 44% of the typical small-growth Morningstar Category peer's portfolio and nearly half of the Russell 2500 Growth Index in January. Zhang is willing to pay a premium for good growth prospects, and valuation risk is significant. The January portfolio's average price/projected earnings ratio was a lofty 52, well above the index's 23 and the category average of 26. That's no fluke: It has been at least twice the index's rate for most of Zhang's time at the helm. The portfolio's price/book and price/sales ratios are also regularly high.
Morningstar Analyst Rating
Morningstar Pillars Process
Role In Portfolio Supporting Player Fund Performance Year
Total Return (%)
YTD 2019 2018 2017 2016
16.09 24.52 14.51 29.27
19.93 -3.16 20.27 7.77 -2.72
Data through 5-31-20
5-27-20 | by Tony Thomas
A proven manager, a differentiated process, and an impressive track record earn Alger Small Cap Focus a Morningstar Analyst Rating of Silver across all share classes. The fund is closed to most new investors. Amy Zhang is an adept portfolio manager. She sharpened her skills in nearly 13 years comanaging Gold-rated Brown Capital Management Small Company BCSIX. Leaving Brown for Alger (and this strategy) in 2015, she retained key elements of Brown's proven approach. She built a small, dedicated research team, but the young group has had turnover recently. It is a reminder that Zhang is essential to this strategy and its prospects. That strategy is alluring. Like Brown, she small companies by operating revenue rather than market capitalization. This helps her focus on companies generating cash with viable products or
Sticking with winners stokes the portfolio's stakes in mid-cap companies. Mid-caps soaked up 48% of
Reprinted by permission of Morningstar, Jun. 22, 2020
successful newcomers like Zhang to create best- ideas portfolios.
Zhang is a spirited manager with a solid pedigree. She spent nearly 13 years honing her skill as a comanager on Gold-rated Brown Capital Management Small Company BCSIX. Although she left Brown for Alger (and this strategy) in February 2015, she retained elements of Brown's unique, high-growth investment approach, such as defining small companies in terms of their operating revenues. She also comanages Alger Small Cap Growth ALSAX with CEO Dan Chung, and in July 2019 she launched Alger Mid Cap Focus AFOZX as an extension of her work here. Zhang has built a small, dedicated analyst team using Alger recruits (she brought no one from Brown), but it is not strong enough to alleviate concerns about key-person risk tied to Zhang. The young team is in flux. In 2020, research associate Caleb Huang left for Baron in March 2020, and software analyst Kyle Chen went to a hedge fund in April. Meanwhile, three of Zhang's four remaining researchers joined her in the past two years; only healthcare analyst Tom DeBourcy has been with her longer. Zhang may tap other Alger analysts for help, including George Ortega, a consumer/Internet technology analyst who also supports Chung. Expect Zhang to hire further support in 2020. Reichart 06/28/2019 Privately held Fred Alger Management has cultivated a strong identity of growth investing since its 1964 founding, including rebuilding itself nearly from scratch after its World Trade Center headquarters were destroyed on 9/11. While its funds have posted mixed results, a few standouts have emerged, including Patrick Kelly's flagship Alger Spectra SPECX and Amy Zhang’s Alger Small Cap Focus AOFIX. Alger’s not immune to competitive threats. As investors’ needs have shifted in an environment where cheap passive and factor-based strategies increasingly pose a threat to actively managed strategies, Alger has responded by rolling out focused portfolios to emphasize its stock-picking approach. The firm has introduced nine focused strategies since 2012, each with 50 stocks or fewer. Alger leverages firm veterans like Kelly and Parent Pillar Average | Katie Rushkewicz
its assets in January, versus the category norm of 41%. Even a few large caps are here. Zhang bought e-commerce platform Shopify SHOP in early 2017 when it was roughly a $5 billion company; by early 2020, its market cap was more than $50 billion. Zhang pared back the position as the stock price ran up in 2019. This helped maintain the portfolio's overall small- and mid-cap orientation. Performance Pillar | Tony Thomas 04/28/2020 Manager Amy Zhang's record here is impressive. The strategy has dominated peers and relevant indexes on both absolute and risk-adjusted returns. From Zhang's February 2015 start through March 2020, the Z share class gained 11.9% annualized. That dwarfed the typical small-growth Morningstar Category peer's 3.3%, the Russell 2500 Growth Index's 4.6%, and the Russell 2000 Growth prospectus benchmark's 2.7%. Although the return stream was a bit more volatile than most peers and the Russell 2500 Growth Index, the strength of those absolute returns powered exceptional risk- adjusted results (as measured by the Sharpe and Sortino ratios). To be clear, Zhang's high-growth investment style was in favor for much of the period--including her heavy tech and healthcare stakes--but her stock-picking also added value. So far, the strategy has offered a potent combination of strong performance in rising markets and decent durability in downturns. During Zhang's tenure, it rose 115% as far as the Russell 2500 Growth Index when stocks advanced but fell only 87% as far when they declined. In 2020's pandemic-fueled turmoil, the fund's painful 31.1% peak-to-trough slide from Feb. 19 through March 18 still fared better than the Russell 2500 Growth's 37.4% drop. It then rallied 32.4% from March 19 through April 27, just behind the index's 33.6% mark.
Focused strategies could help diversify the firm’s asset base, which has been dominated by Kelly’s charges. But one has already been liquidated. Meanwhile, the firm has had mixed results hiring experienced investors to build out its global and international offerings, with some outside teams not working out. Plus, despite some cost-saving efforts on the institutional front, fees tend to be above average. This firm receives a Neutral Parent rating. Price Pillar | Tony Thomas 04/28/2020 It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.
Above Average | Tony
Thomas 04/28/2020 Manager Amy Zhang's investing acumen is key to this strategy's success, earning an Above Average People rating.