For this week’s episode of ETF 360, ETF Trends CEO Tom Lydon and CIO Dave Nadig spoke with Amy Zhang, executive VP and portfolio manager for Alger, who discusses the company’s mid-cap approach.
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Coming out of the financial crisis, it seems as though smaller stocks are coming into their own. As Zhang points out, it’s important to be in an inefficient market, and the mid-cap market is very inefficient. This makes for very fertile ground for stock pickers, which Alger is great for in active management.
As pointed out, Zhang runs the Alger Mid-Cap 40 ETF (FRTY), which is a 90% active share. Discussing what makes it work as active is the current prevalence of cheap beta. The alpha strategy is about high conviction, whereas Alger is happy to invest in both high-quality growth companies and exposure to the depressed end market to help them participate in the cyclical recovery.
As far as reopening mid-cap stocks, Zhang notes what companies to be excited about, which revolves around firms with high quality and secular trends.
“For example,” as Zhang notes, “One of the companies we invest in is US Foods. That’s the second-largest food distributor in the US, and it’s also the most innovative and tech-savvy. Clearly, there was a huge secular trend of dining outside of the home before the pandemic. Before Covid-19, it was about 50-50 in terms of eating outside of the home. Now, the percentage is 35%. So, clearly that’s a huge opportunity to get back to the 50% but also higher in the long term. This makes it a very powerful underlying secular trend.”
More importantly, concerning US Food, which suffered from the pandemic, the help from the government through the restaurant revitalization fund gave the company a powerful tailwind to work with. That is important to note, given the size of US Food, which can take market share away from the smaller players in a consolidating industry.
“We think US Food is really well-positioned to capitalize on cyclical recovery.”
As far as the plan for investing in mid-cap companies, Zhang confirms that it is partly about finding companies that are excellent acquisition targets and ones that have done well in MNA. It’s about growth and positive dynamic change, so there are both high-growth companies on one side and perhaps companies going through a sort of renaissance.
“We want our companies to be a compounder in our clients’ portfolios for creation,” Zhang adds.
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