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Zhang: Opportunity in Healthcare Amid Digital Transformation

Christopher Franz, CFA

Chris Franz:  Hi, I'm Chris Franz of Morningstar. We're here at the 30th annual Morningstar Investment Conference with Amy Zhang, portfolio manager of the Alger's Small Cap Focus Fund.

Amy, thanks for being here today.

Amy Zhang: Thank you, Chris, for having me.

Franz: Amy, you've run the funds since early 2015 and, in that time, you've amassed a really strong record. I was wondering if you could kind of talk about your unique investment approach and specifically, what you look for in investing in companies?

Zhang: Yes. We have a very unique strategy, and we invest differently from our peers in the small-cap space. At the core of what we do is identifying exceptional small companies undergoing positive dynamic change that the potential to become exceptional large companies.

We define smallness in terms of revenue, because I think revenue is a better indication of size than market cap. An initial point of investment we generally have revenue less than $500 million, and we're looking for revenue to double in three to five years. We're benchmark-agnostic; as a result, we have high active share. Our portfolio acts as an excellent diversifier for our clients because we don't own household names, so it's all about alpha generation. 

Franz: I do want to, if I can interrupt, talk about some of the sectors you do invest in. You mention you're benchmark-agnostic. The portfolio lends itself to technology and healthcare names. Certainly technology's been a theme of the conference thus far. How do you think about the portfolio in terms of risk then, being so concentrated in healthcare and technology?

Zhang: Stock selection is our competitive advantage, so sector weighting is really a residual of our stock-picking skills. So to that extent, as you know, innovation is a common theme for our companies, because we look for companies that can transform an industry and is dominant in a particular market niche and have large expanding market with very wide moat, so they can support the durability of the revenue growth over the very long term. That lends us to generally healthcare and technology, but within those two sectors we actually have a very broad subsectors. I think about business risk a lot, so it's actually very diversified, that our company have very diversified source of revenues and customer base so they're not correlated to each other. That's why our portfolio actually is less risky than a benchmark. Generally our beta is less than 1 and our three-year track record, our downside capture is 72 and our upside capture is 111. So while we pay a lot of attention, it shows that we can do really well in a down market, we can still participate fully in an up market.

Franz: I'm kind of curious then, maybe specifically within healthcare and technology, where are you finding opportunities right now?

Zhang: Well again, innovation is a common theme so as you know, digital transformation, that's universal, and data advantage is universal. Most of our companies have that cloud data analytics advantage. What I mean is to have massive data optimize that and can turn those data into actionable information. That is not only in technology of course, it's cloud computing, there's artificial intelligence, machine learning with big data. But for example healthcare is very important, because doctors need to have massive clinical data for example, streamlined and automated turn into actionable insights that can improve patient outcome and for safety and saving lives.

On the industrial front, we have industrial automation, for example, machine vision, that automate manufacturing. Of course other themes we believe very strongly in, for example, e-commerce taking away share away from brick and mortar and also cybersecurity. The list can go on. For healthcare, again, saving life is very important. Demographically, there's aging baby boomers so we have companies really in the forefront of innovation that address those clinical needs and doing screening and early detection of critical disease.

Franz: Great. Amy, thanks for being here today.

Zhang: Thank you for having me.

Franz: For Morningstar, I'm Chris Franz. Thanks for watching.