​Podcast: Longing (and Shorting) for 2021​

As we look to 2021 on the long side, we believe strongly that our companies are poised for continued growth just because of the changes that are accelerating in the economy.  And on the short side, I don’t think we’ll have any lack of raw material to work with. In our latest podcast, Client Portfolio Manager Alan Kirby discusses why investors might consider a hedged equity solution in the current economy.

ALEX BERNSTEIN: Hello, I’m Alex Bernstein and you’re listening to The Alger Podcast, Investing in Growth and Change.  It’s always great to talk to Alan Kirby.  Alan is a client portfolio manager at Alger and, in a typical year, spends most of his time on the road, going town to town, excitedly telling investors about Alger products–especially our hedged equity strategy, Dynamic Opportunities which has been prominently featured in the news recently. 
Alan, thanks so much for joining me today.

ALAN KIRBY: Thank you, Alex.

ALEX: Alan, just to start off, tell me about the kind of year you’ve seen with the Dynamic Opportunities strategy.  

ALAN: Well, I think that when we look at Dynamic Opportunities, Alex, from an attribution standpoint, we believe the fund, like most long/short equity strategies, benefits from volatility.  And this has been a year in 2020 when we’re seeing a heightened VIX, which is sometimes called the fear index.  

So, in an environment like that where we had the sharp downturn in February and March, we had the subsequent return of markets to their present level today.  It’s just been an unusual year.  And we’ve had people saying, Should I be worried about valuations, should I be worried about volatility?  Should I take money off the table?  And I think that that has led a lot of them to consider hedged equity. 

ALEX: Alan, just to clarify, what does “hedged equity” mean and how does that apply to a strategy like Dynamic Opportunities?

ALAN: For hedge funds, one of the biggest footprints in the hedge fund bucket of assets is long/short equity.  And that’s what Alger Dynamic Opportunities is.  So, there is one growth portfolio that is long only, meaning that we buy stocks that our fundamental research suggests will go up in value.  

But we have in Dynamic Opportunities a complementary portfolio of short positions.  And this is where we borrow the stock from a prime broker with the expectation that the stock is going to fall in price.  And when we buy the stock back; this is called covering the position.   

ALEX: Alan, you mentioned to me one of the possible benefits of a hedge equity strategy like Dynamic Opportunities is something you call “style box equity.”  What do you mean by that?

ALAN: Well, style box equity, when we think of fund classifications, you have large cap, mid cap, small cap.  You have growth, core to value and those three across the top and down give you nine boxes.  And for many of the investors that we work with, they have an asset allocation scheme and they adjust it.  It’s a very complicated thing to put together.  

So, this fund really spans the capitalization spectrum, that first part of the style box, from small to mid to large.  We have all three in this fund.  And when it comes to the growth versus value question, we are fundamental, bottom-up growth investors and our long portfolio is going to be completely invested in innovation.  

When you think of Alger, you think of one word:, innovation.  We believe we have high unit volume growth, positive life cycle change companies that are going to benefit from the disruption and artificial intelligence, cloud computing and just really everything that we see accelerating in the Covid environment.  But when you take a look at the short portfolio of Alger Dynamic Opportunities, what’s really interesting about it is you’ll find really the exact opposite.  You’ll find some old economy companies, you’ll find for example some REITs that have to pay out all of their income as a dividend and that are invested heavily in places like brick and mortar strip malls, which are being rapidly displaced by online retailing.  

ALEX: So, when the volatility from the Covid era begins to settle down and we arrive at  whatever our new normal is, how might an investor then consider hedged equity?  

ALAN: That’s a terrific question.  I would say, Alex, that I’m not a macroeconomist.  But as we look into 2021 and 2022, on the long portfolio of Dynamic, we believe strongly at Alger that our companies are poised for continued growth just because of their fundamentals and because of some of the changes that I touched on earlier that are just accelerating in the economy.  

For the short portfolio, I think there will be no lack of short ideas for the team to select from, especially as we look into 2021 or 2022. I don’t think we’ll have any lack of raw material to work with.

ALEX: Alan, have there been any particular longs or shorts that have been surprises for this strategy over the past six months?

ALAN: Well, one stock that performed I think even better than anticipated is a leading provider of learning solutions and services to four-year college students.  And this is a company that we’ve known for a long time.  About five years ago it completely revamped its business model by de-emphasizing textbook rental and focusing on providing online services for tutoring of four-year college students in the United States principally.  And primarily in STEM subject majors, science, technology, engineering, mathematics.  

This is what I mean about Covid accelerating things.  The company has been doing very well in terms of subscriptions of college students in the U.S.  There are approximately 21 million four-year college students in the United States and this company that I’m referring to had by the end of ’19 kind of a meaningful single-digit amount of that population.  

When Covid hit, of course all the students left on spring break in February and then subsequently across the United States, most of them were told, Hey, you cannot return to campus.  You must go home.  If you move back into the dormitory and one of you has the virus, you could give it to everybody and we’ll have a real catastrophe on our hands.  And so, students very rapidly and very quickly moved to an online learning format.  

And when they did that, we looked at this stock and thought, wow, this stock may stumble right now because who knows what the students may do in this environment.  They may step away; they may have to take a gap year, for example.  But quite the opposite took place.  In the first quarter for their earnings, subscriptions to the internet site actually rose by 41 percent.  

And so, when we move away from that and we look back, when we look back on that, we really looked at the stock and said, Gee, now as we move forward from here, how will online tutoring services play out?    

What they’ve been seeing are international students signing up for this online tutoring service, which already had over, I think, six to seven million U.S. college students signed up.  And suddenly students in places like Saudi Arabia, South Korea, Turkey … imagine a four-year college student in Istanbul signing up for this English language tutoring service.  And so, in places that they’ve never spent a penny on marketing, they’re now seeing a global demand.  And so, this has taken a company with a fantastic idea, fantastic business model and just Covid has absolutely accelerated it into new global markets in ways that even the management team didn’t anticipate.  And now they’re working rapidly to try to accommodate those overseas markets.  So that’s one good example.  

ALEX: And did you have a short example that surprised the team?

ALAN: We had one short position that was a REIT.  It was a real estate investment trust and it was formed by the holding company of a major U.S. retailer.  And as that retailer had big box stores closing in the United States and, again, exacerbated by Covid, the REIT’s purpose was to try to find tenants to assume the existing leases of these big box stores.  You can picture a great big box at the end of a suburban shopping mall.  

And the REIT was trying really hard to find other companies to take on extant lease obligations and they found things like restaurants or movie theaters or game facilities for young children.  And then when Covid hit, all of those companies subsequently had to cease operation because you can’t have large groups of people gathering in small indoor spaces.  I mean, not that a mall isn’t a sizeable place but gathering in large groups in indoor spaces.  And so that particular REIT really fell.  

ALEX: Alan, my last question is: at Alger, in a regular year, you are a true road warrior–someone that has to practically live in hotels and airports to do your job.  How has all of this changed for you this past year?

ALAN: Well, we did travel a great deal in the field with all of the different channels of distribution that we have supporting various products at Alger.  What we transitioned to very quickly was the ability to use video conferencing, to leverage calls, and to bring information to audiences of clients and potential investors more flexibly, more efficiently than if you were just face-to-face in front of someone, in front  of an office because you have your computer available to you and all of the information reservoirs that we use.  And instead of an answer where you might have to say to someone, gosh, when I get back to my office I’ll look that up and find that number for you, Alex, you might be able to actually find it in real time just while you’re on the call with the person and close that loop.  

So, in some respects, you miss the face-to-face contact, because we have terrific relationships with so many of our clients and we value them and it’s fantastic to just see them.  

But for me, I think that the ability to get information to people rapidly and efficiently and comprehensively, especially on a product like Dynamic Opportunities, which has a lot of moving parts.  And I say that in a positive way that it has a lot of moving parts.    I think that the online environment has actually enhanced that.

ALEX: Alan, thanks so much for talking with me this afternoon.

ALAN: Thank you, Alex.  

ALEX: And thank you for listening.  For more information on the Alger Dynamic Opportunities strategy and for more of our latest insights, please visit www.alger.com.​

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