Amy Zhang: Managing Through Volatility
Small cap has always been volatile in the 16 years that I've been managing it.  We spend a lot of time differentiating bumps in the road versus permanent impairment of fundamentals.
In our latest podcast, Small Cap Portfolio Manager Amy Zhang discusses current volatility in the market and whether small cap equities may be too exposed or if they can actually offer additional investment ​opportunities.

BRAD NEUMAN:​ Hi.  This is Brad Neuman, Director of Market Strategy at Alger and you’re listening to the Alger Podcast.   Managing any type of equity investment portfolio can be challenging during periods of market volatility.  When it comes to small cap portfolios, many investors are undecided whether these vehicles are too exposed to volatility or if they can actually offer additional investment opportunities.  
To address some of these questions, I’m joined today by Amy Zhang, Portfolio Manager of the Alger Small Cap Growth and Small Cap Focus Strategies.  Amy has 23 years of investment experience and has spent a significant amount of that time managing small cap strategies.  Amy, thanks so much for joining us.
AMY ​ZHANG:  Thanks, Brad.
BRAD:To start off, what factors do you think have driven the recent market volatility? 
AMY:  I think there are more machine trading and the proliferation of passive management.  Also, investors are becoming more shorter term oriented.  So, that has driven volatility more.  And recently, I think, volatility is really more driven by fear sentiment.​
BRAD: As a small cap portfolio manager with a considerable track record, how do you compare the recent volatility to some of the historic periods of volatility that you’ve experienced?​
AMY:  Small cap has always been volatile in the 16 years that I’ve been managing it.  I wouldn’t say I prefer it, but I’ve been doing this long enough that I think I’m pretty good at navigating through volatility.  For example, I’ve bought a lot on weakness.  And we spend a lot of time differentiating bumps in the road versus permanent impairment of fundamentals.  I think small cap investing particularly requires a specific mindset of patience and then tolerance for pain, because small caps do not grow in a straight line.  And for us here at Alger, we spend a lot of time stress testing our bear, base, bull cases.  We really focus on a long-term view and intrinsic value. I do get excited even though usually it’s accompanied by temporary pain.  But again you’ve got to take the good with the bad.  
At the end of last year/beginning of this year, when the market was very pessimistic, I really felt that was wrong.  So I didn’t change the way I manage, meaning I didn’t ever let the market reaction dictate my behavior.  It’s very important to stay disciplined and consistent. 
I was at a health care conference, and that was very robust in terms of the tone.  As you know, we invest a lot in health care, so it’s very important for both biopharmaceutical companies and the medical devices, diagnostic companies. The overall tone was very positive, very robust.  
So, I think it’s very important to take advantage of volatility.  I’ve seen numerous exampl​​es in my career as a small cap portfolio manager, so I think that definitely creates opportunity.
BRAD:  Do you think we’re likely to see recession this year? 
AMY:  I don’t think we’re in recession at all this year because fundamentals are still very strong for companies.  I think we have a very dovish Fed, and I think that helps in terms of the valuation of small cap stocks because we cannot just only think about fundamentals.  We do care about valuation, but in the small cap area, it’s a very fertile area for active management, and there are always opportunities for growth not priced in.  So that’s why we think it’s great to be in this space. 
BRAD:  Do you think small caps are particularly impacted by this kind of volatility?  
AMY:  Pattern recognition is very important, I think, as a portfolio manager.  So, I think I am grateful that I’ve been doing this for so long that I’ve seen a lot of times the same movie playing, and I think I can see the playbook.  We always use volatility as our friend when there’s a big disconnect between fundamentals and stock prices.  
BRAD:  Do you find yourself making particular adjustments during market volatility?
AMY:  Well, it’s not so much market volatility.  I differentiate volatility from risk.  When I think about risk, it’s business risk like earnings risk or company fundamentals, and is a company decelerating?  So, we of course pay more acute attention.  In an extreme volatility environment, it’s more asymmetrical – meaning companies are punished a lot more if the fundamentals are decelerating.  So, we pay more attention to that.  We want to make sure our companies have company-specific drivers that are still in place.  So, that’s what we’re doing.  
You’re never going to see this as a utility portfolio.  We’re still going to invest in health care and technology, some in consumer and some industrial.  It’s decidedly the growth sector.  But this is still going to be a growth portfolio, and I think the periods of extreme volatility probably will be one of those best periods to position it for future growth.
BRAD:  So, for the sectors you typically focus on, you continue to favor them during periods of volatility?
AMY:  Yes, because, well... I use the analogy of motorboats versus a sailboat in the sense that we’re thematic, and we want to invest in companies that have long-term powerful secular drivers.  And so those are the motorboats that have long-term value-creating engines, even though in the choppy water of volatility, the economic winds, they’re not going to tip over.  They’ve got to navigate like everybody else, but because their secular drivers are much stronger, they can generally trump the cyclicality.  Whereas if it’s a sailboat, it’s much more subject to economic winds.  That’s why I generally do not like to invest in a cyclical growth company.  
I mean there are some in the industrial space, and almost everything is somewhat cyclical, but we want to make sure the secular drivers are much more powerful.  
BRAD:  Amy, thanks so much for joining us today.
AMY:  Thanks, Brad.  Great talking to you.  Always a pleasure.
BRAD:  And thank you for listening.  For more information on the Alger Small Cap Growth and Small Cap Focus strategies, please visit 
​Click here for​ more information on the Alger Small Cap Growth Strategies.​​​
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​The views expressed are the views of Fred Alger Management, Inc. as of February 2019. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategy managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities.  References to or implications regarding the performance of an individual security or group of securities are not intended as an indication of the characteristics or performance of any specific sector, industry, security, group of securities or a portfolio and are for illustrative purposes only. Alger has used sources of information which it believes to be reliable; however, this publication is not intended to be and does not constitute investment advice. 

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