The Alger Focus Equity fund posted a return over the year of 56.3%, while another of its strategies, the $564m Alger American Asset Growth fund, was up 52.39%.

While surging share prices in Nvidia and other US tech stocks on the back of AI have been among the largest contributors to performance over the last year, the Alger American Asset Growth fund is one of the few actively-managed funds to beat the S&P 500 over a 10-year period.

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Speaking to Portfolio Adviser, Alger CEO and CIO Dan Chung says that the firm’s long-term performance is down to a lot more than just holding Nvidia.

Chung is a named manager alongside Dr Ankur Crawford and Patrick Kelly on Alger American Asset Growth, while Crawford and Kelly also run the Alger Focus Equity fund.

“Over a long-term period, its not about a single stock. It’s hundreds of decisions every year, and sometimes the decision is not to sell,” Chung says.

“We were early in Nvidia, buying in 2022. After 2023 saw a spectacular rise in the stock, a lot of people were saying that it must be time to sell, without carefully understanding the fundamentals of the business and how early on we are in the AI revolution. Our biggest and best decision was not to sell any of our Nvidia stock at that time, and it remains a top holding.

“Over the longer term, the success of the strategy has been a relentless focus on the depth and the quality of our team. 60 investment professionals for a firm of our size is actually quite a lot.

“We have a concentration of analysts that is probably 2-3 times more than a lot of our competitors.”

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The firm’s investment approach seeks to benefit from what Chung labels ‘positive dynamic change’. Reviewing the performance of the Alger American Asset Growth strategy over the last 10 years, in which it has posted a 430.8% return (as of 7 January), he says it has been a period of immense change.

“That period started with coming out of the great financial crisis, before entering into the most radical changes in American politics in decades.

“Our relentless focus on our philosophy of positive dynamic change – it means that culturally, as an investment firm, we’re very focused on embracing change. Don’t be afraid of disruption, innovation and volatility. Instead, we look at it as an opportunity to look for the positives that come out of these changes.

“The world is changing faster. There is more innovation and more disruption, which means winners and losers are created faster than they were in the past.

“It’s a highly competitive game. It requires people, but it also requires that right philosophy and mindset.”

European growth

The New York-based boutique is a growth equity specialist, and though it is better known back at home, the firm is looking to expand its offerings in Europe.

“We only have about 5% of our clients internationally — we have a two-person office here in London and a one-person office in Singapore, and we’re trying to grow in both regions.”

“We have been interested in talking with European asset managers in a similar situation, whether we can partner to help them grow in the US, and help Alger grow over here.

“There are some very obvious advantages for a European asset manager to consider partnering with a firm like Alger. We can offer significant US distribution. I’ve met many firms here that are actually quite large and don’t really have any US distribution, and we don’t have significant European distribution. The opportunity is pretty large.”

Industry M&A

The firm, founded in 1964 by Fred Alger, recently celebrated its 60th anniversary.

Industry M&A has seen many boutique firms in both the US and Europe swallowed up by larger asset managers.

However, Chung says that this trend has led to the unique selling points of larger asset managers becoming distorted, which can be exploited by existing boutiques.

“We’ve been taking advantage of the industry structure right now. In traditional asset management, you have a few global giants, and then you have a lot of very big companies just outside of the top 10.

“A lot of them have been created out of multiple mergers. The challenge there is that they don’t have the distribution scale of the largest names, and because they’ve been created out of mergers, a lot of them are like supermarkets. They offer everything, but they’ve lost a little bit of what they are best at.

“They all originally had something that they were really good at, whether it was bonds, equities or real estate, but now that they’ve become these large ‘supermarkets’ – they’re trying to compete with the Costco’s and the Tesco’s.

“They have a lot of challenges because it’s hard for them to grow as they’re large already. Their cultures are just within the team of the investing, and they’re not necessarily particularly known to be particularly at any one thing.”

‘Income funds’ was the most-searched category on the firm’s site the previous quarter but went neck and neck with capital growth funds in the fourth quarter, with each accounting for 40.6% of searches over the three-month period.

There was a market rally among growth funds investing in areas such as technology, smaller companies and biotech after the US Federal Reserve hinted at an end to interest rate hikes in December, which could explain the renewed interest from advisers.

However, Aegon Diversified Monthly Income still took the top spot for the most-searched fund over the final quarter of 2023, accounting for 3.5% of all views – increasing by 1.7 percentage points from the previous quarter.

The £821m fund was up 10% in 2023 and offered investors the highest yield in the IA Mixed Investment 20-60% Shares sector at 6.1%.

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In at second was Amati UK Listed Smaller Companies, which gained a considerable amount of attention in the fourth quarter considering UK equities have been out of favour for some time.

Indeed, two UK sectors – IA UK All Companies and IA Sterling Strategic Bond – were the most searched groups in the final three months of 2023, accounting for 11.8% and 10.4% of all searches.

After 28 months of divestment from IA UK All Companies funds (resulting in £19.3bn of outflows), Square Mile business development director Scott Dakers said this could represent the beginnings of a return to the sector.

“The UK, which has been unloved by asset allocators for several years, saw an increase in interest, possibly suggesting a shift to a more positive sentiment towards our domestic market,” he said.

The most searched responsible funds – Wellington Global Impact Bond, FSSA Asia Focus and CT UK Social Bond – all invested in fixed income, which is unusual for ESG funds according to Dakers.

“Historically, the responsible investment field was dominated by funds investing in equities and this shift perhaps reflects the greater diversity of options available and the maturity of responsible investment as a whole,” he added.

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Despite improving over the period, allocations to risk assets are still under the 10-year average among multi-asset managers.

The report utilises new manager search data to gauge market trends, rather than official asset allocation percentages which are updated on a periodic basis.

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Managers are increasingly interested in fixed income, with searches for the asset class making up 18% of new queries, compared to 11% in Q1. The firm said that within fixed income portfolios, they have witnessed a movement towards investment-grade corporate bonds due to higher yields.

However, private markets continue to be targeted as strategies in the sector made up 53% of all new manager searches, though this was down from 58% in the first three months of the year.

Bfinance noted that growth-oriented equity strategies and emerging market equity and debt managers all delivered strong results over the quarter, while value portfolios suffered.

Back to Basics

In Q2, the consultancy firm commented there was a desire among investors to go ‘back to basics’ in their portfolios.

The report outlined that across the board, investors are focusing on resilience, risk and re-evaluating the core of their portfolio, or in other words, “getting the basics right”.

“In equities, we see investors concentrating on broad global developed market mandates and quality styles, with high demand for assets that exhibit strong fundamentals, resilient earnings growth, sustainable competitive advantages and pricing power.”

Institutional investors are also safeguarding portfolios against over-diversification.

“Over-diversification is a real risk: it can erode outperformance, lead to convergence to the benchmark and increase investments and governance costs,” the report added.

“In a bid to limit potential over-diversification, we see investors reconsidering the number and type of asset managers in a given asset class. There a various ways of doing this.

“For example, in equities, one pragmatic approach is to focus on a set of style ‘building blocks’ that can complement each other, exploiting the negative excess return correlations between investment styles. Different styles benefit from different macroeconomic and market conditions with results visible over different time horizons.

“The manager roster can be simplified around these building blocks; subsequently it is important to conduct frequent reviews to ensure that managers adhere to their intended styles and that the portfolio continues to be exposed to selected factors in a balanced way.”

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