In the two years since Weatherbie Capital took over management of the Alger SMid Cap Focus Fund (ASMZX), the $570 million fund has pushed its way to top of the mid-cap growth category.
Key changes under the management team of Joshua Bennett, H. George Dai and Matthew Weatherbie have included the adoption of the "Weatherbie 50" concentrated portfolio and looking beyond the traditional small- and mid-cap hunting grounds of health-care and technology stocks.
We talked with Mr. Bennett about how the Weatherbie strategy has influenced the performance of this 11-year-old fund since Weatherbie Capital became a wholly owned subsidiary of Fred Alger Management in March 2017.
InvestmentNews: What type of investor would be appropriate for this fund?
Joshua Bennett: The ideal investor for us will be somebody who has the same long-term perspective on investing that we do. What we do is truly differentiated, we would call it smaller-cap quality growth.
We're looking at companies as if we were going to own the entire company, and we're thinking out three to five years, and often longer than that. When we're establishing an initial position in the company we're not thinking about this quarter or the next year.
IN: Can you summarize your investing style and approach to portfolio construction?
JB: It comes in three pieces. We have an experienced and focused team and we average 20 years experience and have been working together on this product for 12 years.
The second part is we like to say we fish in a different pond. We do health care and we do technology and we do those sectors well, but that tends to be all of what many our peers do. We love to find growth in unusual places, and often that leads to these disruptive companies in mundane industries.
And finally, once the portfolio management team settles on the Weatherbie 50, each of the three PMs makes a discrete, conviction-weighted sub portfolio of the best names that they can find within the 50, and those three sleeves roll up to what our clients would be investing in.
IN: This fund has been around since 2008, but its performance has consistently outperformed its peer group since the Weatherbie team took over management in March 2017. What are you doing differently?
JB: Prior to 2017, the way Alger SMidcap Focus was run was more akin to what you would see many of our peers doing today.
They are single or star-managed portfolio and likely heavily focused in health care and tech. They did not have this kind of extra element, where we truly have a broader aperture of companies that we're looking at because we do health care and tech, but we love finding these off-the-beaten-path names.
They didn't do any of that. They were essentially, to my understanding, much more akin to the traditional smaller-cap growth fund.
IN: The above-average performance is nice, but should financial advisers assume that also comes with above-average risk, including a higher standard deviation?
JB: We would not say it's a higher risk fund. We have plenty of risk controls in place.
What you might pick up in the higher standard deviation is that markets have been whipped around quite a bit. That means that the names we invest in are higher quality, so in the long term you should see less variability in the names that we own
But recently you've seen a little bit higher variability, and that's going to be a function of the fact that we run a focused portfolio.
Our top 10 holdings are a little over 40% of the assets in the fund. But the variability in any shorter time frame, in any quarter or month or year, will be driven by the variability really of the top 10 holdings.
IN: What's the history behind the Weatherbie 50?
JB: That's more of a recent branding of a product that has been in place a long time.
From the founding of the company in 1995, we've always focused on owning between 50 and 60 stocks. More recently, in the 2014 time frame, we did an extensive analysis of our trading and the results, and we put a lot of resources toward trying to understand what's driving our performance. And what came out of that was a distinct realization that the top names in our portfolio were consistently driving the majority of our performance and that had we owned more in our top positions, we would have actually performed better.
So we didn't make any radical change but there was a slight tweak toward saying that we're comfortable having a focused fund and moving closer to 50 names overall.
IN: Is this fund more small-cap or mid-cap, and what are your parameters?
JB: We tend to find that the best opportunities are those companies that are past the perils of infancy. They're established companies that are well on their way to establishing profitability, revenue growth is solidifying, and they have strong market position. But we're looking to get in early because we're trying to hit the sweet spot of the growth cycle.
We really want to get into companies that have somewhere around $500 million of market cap on the low end. We're trying to get in early, trying to get in before $2.5 billion in market cap. But we let our winners run, and we can let our winners run right up to $15 billion in this fund.
IN: Where are you seeing opportunities these days?
JB: When you're only looking for 50 stocks and you have a potential universe of close to 1,500 stocks to choose from, we are constantly evaluating the market and we have four folks on our team who have specific responsibilities for different growth areas of the market.
We look for opportunities across all areas of the market. The obvious areas are places where we see disruption and where we see a lot of change going on.
IN: How do you navigate or factor in geopolitics and things like tariffs and trade wars?
JB: It absolutely factors in on a name-by-name basis, but we are not macro investors, we are not top-down investors where we see a theme like tariffs coming and consider which companies are going to benefit or be hurt by that.
Rather, we look for companies from a bottom-up, fundamental standpoint, companies that have strong and widening moats around the business.
Some of that can be impacted over time by the impact of tariffs. One of the huge advantages of this fund is smaller companies tend to be more U.S.-focused than your traditional larger-cap companies.
IN: What's the biggest challenge of managing an active stock portfolio during a 10-year bull market that seems to favor passive investing?
JB: Without a doubt, the passive investing trend has been strong, and we can all see that in terms of fund flows. But we think what we do is truly different in terms of active, and what I mean is if you think about the passive market, what works there is it's very broad, very shallow, and it's very fast churning.
Every one of those passive funds is investing in a broad set of stocks. The manager behind that, which quite often is a computer or a bot, knows nothing about those stocks so it's very shallow, and they move quickly in and out of names.
We think the right way to invest and to beat those passive indices, which we are doing, is that we go narrow, we go very deep in the research we do on those 50 companies, and then we're very methodical and thoughtful about how we turn the portfolio over.
We always go back to the fundamentals whenever the stocks in our portfolio move and carefully ask if this is an opportunity to add or an opportunity to trim a name.
IN: What's your general outlook for the second half of 2019?
JB: We continue to see very good fundamentals of the companies we're investing in. We're obviously aware of the warning signs that everybody is looking at — things like the yield curve and China.
We see there are potential risks that we need to monitor carefully. But when we meet with our companies, the fundamentals of the 50 stocks we own are very sound for the most part. So we get very excited about the 50 that we own, particularly when you think about that relative to the broader market.