Alger Breaking Views: Risk Re-Examined
Last summer, we​ said that we believed companies benefiting from change might serve to mitigate investor risk, particularly in a weak economy. In our view, we think that prognostication is now playing out in this pandemic environment. In this brief video, Alger Director of Market Strategy Brad Neuman discusses how some current growth stocks may not only be outperforming value stocks, but also exhibiting lower comparative risk. ​​​ ​

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BRAD NEUMAN:
  At Alger, we have always had a somewhat different view of risk. We have always started with fundamental risk, which we quantify through detailed scenario modeling, rather than relying on traditional quantitative risk measures like standard deviation.

For years, we have viewed the massive changes occurring within the economy as the primary source of risk and opportunity. Last summer, in our quarterly Capital Markets Observations & Insights, we wrote, “We believe those companies benefitting from change will serve to mitigate investor risk while those on the losing side are likely to create undue risk, particularly in a weak economy.”

In our view, that prognostication is playing out in real time in this pandemic environment. We believe this crisis has accelerated the changes that we have been investing in for years, such as e-commerce and cloud computing, as well as genetic testing and manipulation, and telemedicine.

The evidence is that year-to-date through April, growth stocks have not only outperformed value equities by nearly 1,700 bps, but they have had lower standard deviation, beta, and downside capture with the latter metric indicating that the Russell 3000 Value has declined more than and the Russell 3000 Growth declined less than the overall Russell 3000 in down markets. Note that these statements hold true for the past 10-year period as well.

We would encourage investors to re-examine their notion of risk in light of the accelerating change in the economy.








Source: FactSet and Alger Analysis.

Standard Deviation measures how much the portfolio’s return has deviated from its average historical return.  Beta measures a portfolio’s sensitivity to market movements relative to a particular index; a portfolio with a beta of 1.00 would be expected to have returns equal to such index. Downside Capture Ratio measures a portfolio’s performance in down markets relative to the benchmark. It is calculated by taking the portfolio’s downside return and dividing it by the benchmark’s downside return. A down-market is defined as those time periods in which market return is less than 0.

The Russell 3000 Index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities.  The Russell 3000 Growth Index is a market capitalization-weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above-average growth. The index is used to provide a gauge of the performance of growth stocks in the United States. The Russell 3000 Value Index is a market-capitalization weighted equity index maintained by the Russell Investment Group and based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates.  Investors cannot invest directly in an index. Index performance does not reflect deductions for fees, expenses or taxes.

The views expressed are the views of Fred Alger Management, LLC (“FAM”) and Alger Management Ltd. (together with their affiliated entities “Alger”) as of May 2020. 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. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security, or any funds managed by Alger.

Risk Disclosures: Investing in the stock market involves certain risks and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Investments in technology and healthcare companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

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