Fred Alger swims against current in world crazy for alternatives

Updated with correction

Growth equity boutique Fred Alger Management Inc. is fighting the trend toward alternatives and other investment strategies.

“It's like swimming in a river against very strong currents,” said Daniel C. Chung, CEO and chief investment officer, in an interview. “Competitors are falling behind us, but when we look to the shoreline, our progress forward is less than it should be. But that's the nature of the markets.”

Still, the New York-based money manager that survived the terrorist attacks of Sept. 11, 2001, also has come through a turbulent several years for active growth equity firms, and some institutions have taken notice. Alger, which had $18.6 billion in assets under management as of March 31, has gained four institutional clients since the start of 2012, according to Alger and Pensions & Investments data:

• the $2 billion Purdue University endowment, West Lafayette, Ind., which put $57 million in the Alger Capital Appreciation strategy, funded last December;
• the $436 million Philadelphia Gas Works Retirement Reserve, $27 million in active large-cap growth in mid-2012;
• Kaiser Foundation Hospitals, Oakland, Calif., $101 million in the capital appreciation strategy, funded in April 2012; and
• the Montana Public Employees Retirement Board, Helena, which added the capital appreciation strategy as an option in its $75 million 401(a) plan early in 2012.

“It's been a very tough market,” Mr. Chung said, with average equity allocations among institutional investors dropping to around 30% today from 50% in 2007. “It's still a large market in terms of equities. Alger is a firm that will be 50 years old next year and has focused on one process that continues to do well in a market with growth out of favor. It's our only business: One philosophy, one process.”

Alger's three largest institutional strategies — the $7.79 billion capital appreciation, $2.46 billion small-cap growth and $2.03 billion smidcap growth portfolios — account for the lion's share of Alger's assets under management, and their performance has topped benchmarks for the one- and 10-year periods ended Dec. 31, according to data from eVestment LLC, Marietta, Ga.

For the 12 months, the capital appreciation strategy returned 19.26% vs. 15.26% for the benchmark Russell 1000 Growth index and for 10 years the strategy returned an annualized 12.32% vs. the benchmark's 7.53%. The small-cap strategy returned 13.63% for 12 months and 12.33% for 10 years, vs. the Russell 2000 Growth's 14.59% and 9.8%, respectively; and the smidcap growth strategy returned 15.63% for 2012 and 12.44% for 10 years, vs. the Russell 2500 Growth's 16.13% and 10.55%, respectively. All multiyear returns are annualized.

The five-year returns for all three strategies were below their benchmarks, with the largest variance being the smidcap strategy, with a 1.15% return that was 292 basis points below the benchmark. “While the absolute returns were positive, they were restrained by a number of material influences, most notably the 2008 global financial crisis,” according to Mr. Chung.

Mr. Chung equated the firm's single focus to a story from his childhood. His parents had bought him a Sting-Ray bicycle, but as he grew older he wanted a 10-speed bicycle that his parents refused to purchase. “I wanted that bike,” he said, “so I looked for a job and ended up subbing on a paper route. I kept that job, which enabled me ultimately to get that bike. It's the same here; people succeed when they know what their goal is and focus on it.”

While Mr. Chung called Alger “one of the hot ones” during the heady global equity days of the 1990s, with AUM reaching a peak of $22.1 billion in March 2000, the ensuing declines from the technology bubble in 2000 and the financial crisis of 2008-2009 made for tough times. But, he added, Alger survived. “The contrast is that many firms diversified into growth in the '90s, but in the last decade they also diversified into other things,” Mr. Chung said. “But that's not Alger. We have been and are a boutique.”

Aside from the market shifts, Alger also has changed since Sept. 11, 2001, when the terrorist attack on the World Trade Center — Alger's home office at the time — killed 35 of its employees, including David Alger, the firm's CEO and chief investment officer. Fred Alger, the firm's founder and chairman, came out of retirement and promoted Mr. Chung, his son-in-law, to CIO.

Before then, Alger had about $1 billion in institutional assets. Institutional assets are now about $8 billion — just less than 50% of total AUM. “In 2008, we re-engaged our sales and marketing effort with institutional clients. Before then, we had not made it a major initiative. Institutional investors have responded very well.”

Prior to Sept. 11, Alger had only one dedicated institutional marketer. Today, there are 11 staff members dedicated to its institutional business, along with eight marketers and two client portfolio managers. “We had a willingness to invest in the (institutional) business, and we're very gratified that we've won new mandates,” he said.

Institutional investors still see a role for global equity in their portfolios. “We've heard from endowments and foundations who allocated too much to alternatives,” he said. “As equity markets continue their recovery, I think we'll do well in getting more clients.”