Analysis of Alger Small Cap Focus Fund
analysis, mutual fund

A recent piece in Barron’s features the Alger Small Cap Focus Fund (AOFAX; Class A shares). This small-cap growth fund has a 5.25% maximum sales charge, 1.20% net expense ratio and 76% turnover. According to the article

The now $537 million fund has returned an average of 10.9% a year over [the current manager’s] tenure, better than the 8.7% for the Russell 2000 Growth index.

The current manager took over the fund in mid-February 2015. Therefore, the following analyses will cover the period from March 2015 onward.

The fund’s prospectus benchmark is the Russell 2000® Growth Index. One of the investable implementations of this index is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that the fund returned more than the ETF in 75% of all rolling 12-month periods with a median cumulative (not annualized) outperformance of about 2.2% per period:

Rolling 12-Month Returns for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The rolling return comparison assesses the fund’s relative performance over a holding period but does not take into account its exposures or risk. To gain insight into the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio whose periodic returns most closely track those of the fund. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. To make replication practical, the membership of the reference portfolio cannot exceed a preset number of ETFs.

Here is the resulting chart of cumulative RealAlpha™ for Alger Small Cap Focus (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Alger Small Cap Focus Fund (AOFAX)

The fund underperformed its reference portfolio of up to six ETFs: it returned less and with higher volatility. (A limit of six ETFs was used to arrive at a more complete picture of the fund’s exposures. Even when the reference portfolio contained just two or three ETFs, the outcome was similar.)

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for Alger Small Cap Focus Fund (AOFAX)

The fund had major equivalent positions in the aforementioned IWO, iShares North American Tech-Software ETF (IGV), iShares U.S. Medical Devices ETF (IHI), PowerShares S&P SmallCap Health Care Portfolio (PSCH), SPDR® S&P® Biotech ETF (XBI), and Global X Social Media ETF (SOCL). These ETFs represent average exposures of the fund over the analysis period.

Finally, let’s examine the risk-adjusted performance of the fund against it dominant equivalent position, IWO, using a traditional model:

CAPM for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The CAPM reveals that although the fund generated a positive alpha vs. the ETF, this intercept was not statistically significant, i.e. its t-stat was well below two. Please keep in mind that this simple, single-factor model does not fully adjust for the fund’s risks.

Under current management, the Alger Small Cap Focus Fund did not add value when compared to its reference ETF portfolio. The fund’s steep front load further detracted from its appeal. The fund currently has only 49 positions, concentrated at about 40% each in the health care and information technology sectors. The P/E and P/B ratios of the fund are approximately twice those of its benchmark index, which suggests that the fund may be highly susceptible to a market correction.

To learn more about the Alger Small Cap Focus and other mutual funds, please register on our website.


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Analysis of Alger Spectra Fund
analysis, mutual fund

A recent piece in Barron’s profiles the manager of the Alger Spectra (SPECX, Class A shares) and Alger Capital Appreciation (ACAAX, Class A shares) funds. According to the article

Over the 10 years ended in December, when Kelly celebrated a decade at the helm of both, they [the funds] ranked among the 10 best-performing stock funds in the U.S. Of both funds, Morningstar writes, “Manager Patrick Kelly is this fund’s most valuable asset.”

In this post, we will focus on the Alger Spectra fund since its return over the past ten years has been higher than its sibling’s. In addition, for our analysis we will use Class A shares of the fund (with the maximum front-end sales charge of 5.25% but a lower nominal expense ratio of 1.52%), as opposed to the Class C shares cited by the article (with a nominal expense ratio of 2.28%).

The prospectus benchmark for the fund is the Russell 3000® Growth index. A practical implementation of this index is the iShares Core U.S. Growth ETF (IUSG). The first full month of the current fund manager’s tenure was October 2004. According to Alpholio™’s calculations, from then through January 2015, the fund returned more than the ETF in approximately 80% of all rolling 12-month intervals, 85% of 24-month intervals and 92% of 36-month intervals. The median cumulative outperformance per interval was about 18.3%, 33.6% and 47.7%, respectively. However, these figures do not account for the fund’s risk.

Other calculations by Alpholio™ indicate that in over the same analysis period, Alger Spectra had an annualized standard deviation (a measure of volatility) of about 16.9%, beta of 1.05, Sharpe ratio of 0.79, and maximum drawdown of 49.7%. This compares favorably to 15.1%, 0.98, 0.55 and 48.4%, respectively, for its benchmark ETF as, by the Sharpe ratio measure, the fund’s risk-adjusted performance was clearly superior to the ETF’s.

Let’s take a closer look at the fund’s performance using a variant of Alpholio™’s methodology in which the membership of the reference ETF portfolio is fixed but individual ETF weights may vary over the analysis period. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Alger Spectra Fund (SPECX)

Since late 2004, the fund generated an annualized discounted cumulative RealAlpha™ of approximately 4.7%, an impressive feat. (To learn more about RealAlpha™, please visit our FAQ.) At 17%, the fund’s standard deviation was only 0.3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.09.

The following chart shows how weights of ETFs in the reference portfolio varied over time:

Reference Weights for Alger Spectra Fund (SPECX)

The fund had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 23.8%), iShares Morningstar Large-Cap Growth ETF (JKE; 15.3%), PowerShares QQQ™ ETF (QQQ; 13.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.4%), Vanguard Information Technology ETF (VGT; 10.1%), and iShares North American Natural Resources ETF (IGE; 6.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights. Clearly, the fund exhibited large- and mid-cap growth characteristics.

Over the last ten years under current management, the Alger Spectra Fund delivered impressive risk-adjusted results. Currently, the fund has a significant exposure to information technology (31.2% of assets) and biotech (healthcare accounts for 20.8% of assets). In the top-ten holdings, four technology stocks account for 15.4% of the fund’s assets. Concentration in such high-risk sectors and industries may be detrimental, should their recently positive momentum subside.

It also should be noted that, according to the article,

Spectra can sell up to 10% of its assets short.

Some of the bets on falling equity prices may backfire, thus increasing the fund’s volatility.

The fund’s 150% turnover contributed to its hefty distributions, which in the past two years ranged from 5.8% to a whopping 13.7% of the net asset value (NAV). Thus, the fund may be better suited to tax-deferred accounts.

To learn more about the Alger Spectra and other mutual funds, please register on our website.


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