Small-Cap Fund With Proven Manager Is One to Watch

Alec Lucas: Alger Small Cap Focus has undergone a complete overhaul since veteran manager Amy Zhang joined Alger and took it over on Feb. 12, 2015. Zhang came from Brown Capital Management, where she had been a key contributor to its successful small-cap strategy for 12-plus years. She’s using the same concentrated approach at Alger. It's a benchmark-agnostic, low-turnover strategy geared toward firms with durable business models and annual operating revenue of $250 million dollars or less. 

Zhang focuses her bottom-up stock-picking on well-capitalized names that can either save lives or make them more convenient. The fund’s roughly 50-stock portfolio has big tech and healthcare stakes, while its typical holding has an above-average return on assets, below-average debt, and a lofty valuation. The portfolio proved resilient in 2015’s challenging third quarter, which was in keeping with the performance of Zhang’s former charge during most market downturns. Zhang already has two dedicated small-cap analysts to work with her at Alger, and she plans to add a few more over time. 

Nonetheless, for long-term success here, Zhang and her team must find their way amidst a broader analyst group schooled in Alger’s high-turnover, aggressive-growth approach. Time will tell, but she’s held her own so far. The fund’s 5.7% annualized loss from her start date through May 20, 2016, while disappointing, is 36 basis points better than the Russell 2000 Growth Index and also a bit better than the small-growth Morningstar Category norm. Small-cap funds with proven management that are still open to new investors are hard to find. This one is worth keeping an eye on.