The Changing Face of the U.S. Economy

FLYER

The Changing Face of the U.S. Economy

Price-to-book value used to be a good indicator of the market’s expectation of stocks. Now, however, we believe this metric is not functioning as intended. A large and important portion of companies’ assets— intangibles—is often not reflected on their balance sheets.

Figure 1: Companies’ Market Values Now Driven by Intangible Assets

What Is Wrong with Book Value? More than ever before, companies’market values are driven by intangible assets such as patents, brands, and R&D (see Figure 1). These assets are expensed and typically are not included on companies’ balance sheets. We believe book value, which generally doesn’t account for intangible assets, is a less accurate measure of a firm’s asset value and therefore its earnings power. This is driving the poor performance of low price/book stocks as new economy companies—growth companies—have more intangible assets. Innovation Drives Outperformance We believe the most significant contributor to this shift is innovation, which usually shows up in the form of intangible assets. In our opinion, innovation is the most powerful force in the economy, and it is increasingly a driver of fundamentals and stock returns. Academic studies and Alger research show that the most innovative companies grow their sales and earnings faster than the least innovative companies and consequently their stocks rise faster too (see Figure 2). Alger Has Expertise Investing in Innovation We believe we are seeing the changing face of the U.S. economy as companies shift from tangible to intangible assets. Our emphasis on innovation, as measured by R&D expenditures relative to sales in our portfolios’ holdings, is evident across our product lineup (see Figure 3). Our team of analysts research companies to value what may—or may not be—included on their financial statements. We believe our original, bottom-up research process can help us find growth stocks that should benefit from innovation, while avoiding value stocks that appear cheap and may simply be victims of change.

Intangible Assets as a Percentage of Market Capitalization

84%

32%

Source: Ocean Tomo. Market capitalization is that of the S&P 500 index. 1985 2015 Innovative Companies Have Outperformed Over the Past Decade

Figure 2: Innovative Companies Have Outperformed Over the Past Decade

Cumulative Excess Return

50%

S&P 1500 Index

Most Innovative

-31%

Least Innovative

Source: FactSet. Most/least innovative stock excess performance is derived from highest and lowest S&P 1500 quintiles based on R&D as % of sales,normalized for market value, using one month returns for 10 years ending 3/31/19.

Figure 3: Innovation Creates Investment Opportunities

Research and Development Expenditures Relative to Sales

Focus Equity Russell 1000 Growth

SMid Cap Focus Russell 2500 Growth

Small Cap Focus Russell 2000 Growth

16.7%

14.1%

12.4%

12.2%

12.0%

11.1%

Source: FactSet – R&D% of sales weighted median data as of 3/31/19. Data is for mutual fund products and their benchmarks.

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TICKER SYMBOLS

Alger Focus Equity Fund

Alger SMid Cap Focus Fund

Alger Small Cap Focus Fund

Share Class

ALAFX

ALMAX

AOFAX

A

ALCFX

ALMCX

AOFCX

C

ALGRX

ASIMX

AOFIX

I

ALGYX

ASYMX

AOFYX

Y

ALZFX

ASMZX

AGOZX

Z

The Board of Trustees of the Alger Small Cap Focus Fund has authorized a partial closing of the Fund effective July 31, 2019. Class A, C, I and Z Shares will be avail- able for purchase by existing shareholders who maintain open accounts and new investors that utilize certain retirement record keeping platforms identified by Fred Alger & Company, Inc., the Fund’s distributor. Class I and Z Shares will also be available for purchase by investors who transact with certain brokers identified by the distributor. Please check with your financial advisor regarding the availability of Class I and Z Shares for purchase at their firm. Class Y Shares will remain open to all qualifying investors. The views expressed are the views of Fred Alger Management, Inc. as of July 2019. Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security, or any funds managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. References to or implications regarding the performance of an individual security or group of securities are not intended as an indication of the characteristics or performance of any specific sector, industry, security, group of securities, or a portfolio and are for illustrative purposes only. Risk Disclosures: Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as the prices of growth stocks tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political and economic developments. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. A significant portion of assets will be invested in technology and healthcare companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Investing in companies of small and medium capitalizations involve the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity. Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, political or regulatory event than a more diversified portfolio. Foreign securities involve special risks including currency fluctuations, less liquidity, inefficient trading, political instability, and increased volatility. The performance data quoted represents past performance, which is not an indication or a guarantee of future results. The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market without regard to company size. The S&P Composite 1500 is an unmanaged index that covers approximately 90% of the U.S. market capitalization. The Russell 1000® Growth Index is an unmanaged index designed to measure the performance of the largest 1000 companies in the Russell 3000 Index with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Growth Index is an unmanaged index generally representative of common stocks designed to track performance of small-capitalization companies with greater than average growth orientation. The Russell 2500® Growth Index measures the performance of the small to mid-cap growth segment of the U.S. equity universe. The Russell 3000 ® Growth Index is an unmanaged index designed to measure the performance of those Russell 3000 ® Index companies with higher price-to-book ratios and higher forecasted growth values. The indices presented are provided for illustrative purposes, reflect the reinvestment of dividends and do not assess fees and expenses that would have the effect of reducing returns. Investors cannot invest directly in any index. The index performance does not represent the returns of any portfolio advised by Fred Alger Management, Inc. and actual client results might differ materially than the indices shown.  Comparison to a different index might have materially different results than those shown. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. Before investing, carefully consider a Fund’s investment objective, risks, charges and expenses. For a prospectus or a summary prospectus containing this and other information about a Fund, call (800) 992-3863, visit www.alger.com, or consult your financial advisor. Read it carefully before investing. Distributor: Fred Alger & Company, Incorporated. Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.

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