The past 2½ years have brought more change and disruption to the world than any similar time frame in, perhaps, decades. Public health, geopolitics, global trade, monetary and fiscal policy, and the way consumers and businesses use technology for entertainment and work have been turned nearly upside down by recent events. That kind of upheaval can be worrying and unsettling, but it also presents opportunities for optimistic, future-focused investors.
So says Daniel Chung, of investment manager Alger, who has had considerable personal and professional experience with big changes. The California native, 59, completed his undergraduate work at Stanford and set out on a career as a lawyer. He studied law at Harvard, clerked for Supreme Court Justice Anthony Kennedy, and continued his legal training at New York University. It was while working as an associate at law firm Simpson Thacher & Bartlett on mergers and acquisitions, capital raises, and other deals that Chung realized being a lawyer wasn’t all he dreamed of.
“Eventually I realized that I was more interested in the business side than the legal side,” Chung says. “The clients were investing large amounts of money, time, and effort — and their financial returns over time were a very objective measure of the success of their ideas and work. I really liked that part of it, working with numbers, and understanding how to connect that to the real world. ”
Founded by Fred Alger in 1964, the firm today manages close to $ 44 billion across several mutual funds, a pair of exchange-traded funds, and other vehicles. Chung married into the Alger family in 1993 and joined the family firm a year later. He now serves as its CEO and chief investment officer, and as portfolio manager on several of Alger’s funds, including
Algiers Dynamic Opportunities
Alger’s investment philosophy is predicated around finding stocks undergoing “positive dynamic change,” which includes both early-innings growth from new or expanding businesses and more-established companies entering a new stage of their life cycles. That can be spurred by new management or products, M&A, or changed regulations or macroeconomic factors.
The Russia-Ukraine war can be one of those growth-catalyzing changes for several companies, Chung says, by adding urgency for the US and Europe to transition away from geopolitically risky sources of oil and natural gas. That should favor US-based shale producers like
Diamondback Energy (FANG) and
EOG Resources (EOG), both holdings in the fund.
Chung also expects more emphasis on energy efficiency and greater military spending in the coming years as a result of the conflict.
The largest position in the $ 687 million Alger Dynamic Opportunities fund at the end of February was
TransDigm Group (TDG), a global supplier of commercial and military aircraft parts and equipment. There’s a postpandemic rebound element to Chung’s thesis as well, as air travel returns to pre-Covid-19 levels. TransDigm also supplies components that make aircraft engines more efficient and sells aircraft parts to air forces — both businesses that could get a boost from second-order effects of the Russia-Ukraine war.
The Dynamic Opportunities fund is coming off a tough year, down about 9% in 2021 versus a 7.5% rise for the
and a 3.5% gain for category peers. But long-term returns look much better: The fund ranks in the top 2% of its category over the past five- and 10-year periods, with annualized returns of 12.2% and 8.8%, respectively. Those returns handily beat competing funds, but still lag behind the S&P 500. The fund has an above-average expense ratio of 2%.
A saving grace for the Dynamic Opportunities fund: It’s less volatile than competing funds and broad market indexes. That’s partly due to the nature of the portfolio, which includes both long and short positions. Short selling involves borrowing a stock and immediately selling it, expecting the price to decline and buying back the stock later, pocketing the difference. Alger’s fundamental research-intensive approach uncovers both winners and losers in the industries covered by its analysts, and the fund will make bets on both.
Take electric vehicles. The fund has held a long position in
Tesla (TSLA) since early 2020. That’s a call on the electric-vehicle pioneer continuing to lead the automotive industry’s transition to battery-powered vehicles. But there are also numerous buzzy start-ups working on their own EVs or other aspects of the EV ecosystem, including new battery technologies. Not all of those will be long-term winners, and sky-high valuations for many of their stocks raise the bar even higher.
“We can invest on the long side in companies that we think are leaders and have key technologies,” says Chung. “We also see a lot of hype — companies that are in the space in name only but don’t have the assets, the people, the tech to win in it. But because of the excitement about the sector, [their stocks] can get very overvalued. ”
The fund is short shares of solid-state battery developer
QuantumScape (QS) and EV start-up
Lucid Group (LCID), plus
Freyr Battery (FREY), which is developing batteries for large-scale energy storage.
Chung says there are better ways to invest in some of the mega-growth trends of the 21st century than the highly valued pure-play start-ups targeting those sectors. The semiconductor industry is one avenue, with large and profitable businesses and the critical technologies enabling autonomous driving, cloud computing, and more.
Semiconductor equipment manufacturer
Applied Materials (AMAT) and chip designer
Advanced Micro Devices (AMD) are among the top holdings in the fund.
“You don’t have to buy an unproven company with an unproven technology,” says Chung. “The demand for the kind of technologies you need to do autonomous driving and cloud computing goes through the semiconductor industry, where returns will be potentially just as good, but less volatile.”
Write to Nicholas Jasinski at email@example.com