- The Alger Small-Cap Focus Fund and Mid-Cap Focus Fund, managed by Amy Zhang, have returned 27.39% and 46.08% this year, respectively.
- Both have outperformed their benchmarks and nearly all of their category peers.
- Small- and mid-cap stocks are not only attractive on a valuation basis but also more insulated from political and geopolitical tensions, she told Business Insider.
- She also shared four stock picks that have helped drive her outperformance across both funds.
- Visit Business Insider's homepage for more stories.
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When Amy Zhang took over the Alger Small Cap Focus Fund in February 2015, the fund had less than $15 million in assets. Five years later, it has ballooned to $5.8 billion.
The exponential asset growth, which led to the soft-closure of the fund to new investments, is a vote of confidence in Zhang's ability to consistently generate outsized returns.
Year-to-date, the Alger Small Cap Focus Fund has gained 27.4% while the $331.9 million Alger Mid Cap Focus Fund — launched last June and also solely managed by Zhang — has returned 46%, both outperforming their benchmarks and most of their category peers, according to Morningstar.
Zhang attributes the outperformance of her strategies to stock-picking and sticking to her core philosophy, which is to identify and invest in "exceptional small- and mid-cap companies that have the potential to become successful large companies."
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She does not try to find these companies in the benchmark but rather through extensive research.
"I don't ever manage the portfolio by overweighting or underweighting the benchmark. I don't even look at the benchmark," she told Business Insider. "It is all about bottom-up fundamental stock selection. I've considered that as our biggest competitive advantage."
From there, the companies selected for her portfolio tend to have "a strong and wide competitive moat, robust top-line and bottom-line growth, high financial quality and profitability that fuels earnings per share growth, and high management ownership."
Under-the-radar small-cap picks
Two small-cap stocks flying under the radar — CryoPort (CYRX) and Natera (NTRA) — fit the profile.
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CryoPort, which provides temperature-controlled supply chain solutions to the life sciences industry as well as gene therapies, is experiencing several tailwinds, Zhang said.
"Their solutions are usually used to ship very high-value biological drugs and vaccines that need extremely strict control with cryogenic temperatures or extremely low temperatures," she said. "And then they have real-time monitoring to avoid spoilage to ensure the integrity of the pharmaceuticals and vaccines because those biopharmaceutical products can be very expensive."
But the shipping and logistics company's most significant market is cell and gene therapy, according to Zhang.
"That's a market that is expected to grow 30% to 40% annually in the next three to five years and beyond," she explained. "And now the company is supporting close to 500 clinical trials."
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Additionally, CryoPort is aided by "an incremental opportunity in the distribution of COVID vaccines" and "two transformative acquisitions announced in August."
"It's a very exceptional, still very small company that I think has the potential to become a much bigger company," Zhang said, noting that the team has held the stock since May 2018 when the stock was trading at $7 to $12 a share.
The stock, which now trades at around $48 a share, has gone up 189.7% this year.
Similarly, Natera, a diagnostic testing company that specializes in the early detection of genetic disease, is also experiencing positive catalysts.
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"There are three parts of this business but we are most excited about what Natera is doing in the rapidly growing oncology market, where the total addressable market is estimated to be $15 billion," Zhang said. "They have a cancer liquid biopsy which is called Signatera. It is a very personalized test that has a customized blood test for each patient and it's a very significant first-mover advantage."
The company's stock has risen 116.6% this year.
Time-tested mid-cap stocks
While Zhang has managed small-cap stocks for 18 years, she finds mid-cap stocks to be the "sweet spot."
"The common company in the mid-cap space has already stood the test of time," she said. "They are generally less risky than small-caps but they are closer to large-cap in terms of quality."
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She has found those attributes in DraftKings (DKNG) and Lululemon Athletica (LULU), which have run up 450.9% and 41.1% year-to-date, respectively.
"We like it because this is the only pure-play online sports betting in the US right now," she said of DraftKings. "The sports betting market is only $1 billion today, which is less than 1% of the overall $160 billion gambling market. Online sports betting should represent 80% to 85% of total sports betting, and we think DraftKings could really gain significant market share."
With DraftKings' other initiatives such as iGaming and ESPN media partnership, Zhang believes that the company is reaching a broader audience by gathering data and turning them into actionable information.
"They use a lot of data science to really drive to their marketing decision," she said. "The marketing automation can deliver the right message to the right user at the right time. That's very powerful."
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Another firm that has stood the test of time is the athleisure company Lululemon. While the company's in-store traffic halted at the onset of COVID-19, its e-commerce business has accelerated.
But Zhang thinks the greatest opportunity in Lululemon is outside of North America.
"Their revenue from outside of North America is only about 12%, but if you look at other peers like Nike or Adidas, 50% of their sales are international," she said. "We think Lulu's increasing focus on APAC, especially in China, will be a key driver of growth in the medium to long-term."
High-conviction long-term investing
Despite the high-growth nature of the names in her portfolios, Zhang subscribes to a 3- to 5-year investing horizon.
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"Nothing is linear in true growth, so think long and think big," she said.
"Thinking big means letting our winners run and having the conviction. Do the research and spend a lot of time differentiating bumps in the road versus permanent impairment of fundamentals."
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