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.