​Podcast: Welcome to the New Industrial Revolution

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We are at the beginning of the fourth industrial revolution, and there is no industry that is not touched by this revolution.  In our latest podcast, Portfolio Manager Dr. Ankur Crawford discusses how rapid digital transformation, as accelerated by COVID, may be a generational opportunity for investors.

ALEX BERNSTEIN: Hello, I’m Alex Bernstein and you’re listening to The Alger Podcast, Investing in Growth and Change.  The rise of rapid digital transformation has captured investing headlines continuously throughout the Covid era and this is a subject that is quite familiar to my guest today, Dr. Ankur Crawford.  Ankur is portfolio manager for multiple Alger large cap strategies, including Capital Appreciation, Spectra, Focus Equity and Alger 25.   Ankur, thanks so much for joining me this afternoon

ANKUR CRAWFORD: Thank you.

ALEX: Ankur, just to start off, can you give us an idea of what you and your team are seeing in the markets right now?

ANKUR: You know the market has really been about a tale of two cities, the haves and have-nots one might call it.  So the key driver of dictating positive performance this year has been companies that are either embracing digital transformation or providing the technology for digital transformations.

You know these businesses are seeing an acceleration in their business model.  Covid turned out to be the catalyst that might I say accelerated this transformation even faster than it was already occurring.  And we’re seeing it in the numbers.  Luckily, we have been actually espousing this viewpoint for years.

For years, we have been talking about how the changes we are seeing are so structural to our society that we are seeing a generational opportunity as investors.  Before Covid, we had highlighted how we had never seen so much opportunity ahead for growth investors in our careers.  And we still see that.  Many CEOs have cited how years of technologies adoption has been pulled forward.

I think reflecting upon the first half of the year, we started to express a higher weighting in ecommerce related plays that were coming under pressure as the market was selling off.  We also found dynamic businesses in the online gaming sector.  And we bought those when the world was really worried about liquidity.

We leaned into consumer businesses that were technology forward.  So, there is definitely a thematic that runs through all of the names that we added.  Currently, we are trying to find those businesses that have characteristics of being both beneficiaries of a normalization but are still deploying techniques that will enhance their growth.  

We’re investing in businesses that are driving change, that change that we see all around us.  Most importantly, we are looking for businesses that will emerge stronger from the crisis because they may have already pivoted their businesses to the new world and are benefitting from that or somehow are positioned better at the end of this pandemic because their competition failed to make it through or they’ve made some strategic initiatives that are enhancing their positioning as we progress through this.

ALEX: Ankur, you recently coauthored a white paper that investors can find at alger.com titled, “The Age of Connected Intelligence,” which talks specifically about anticipating the kind of technological revolutions that we’re seeing right now, up and close.  Can you talk about what you were thinking about with that paper? 
ANKUR: Sure. So, the point of the paper was to highlight three things.  The first was we believe we are at the beginning of the Fourth Industrial Revolution.  We believe the timeline for this revolution is going to be significantly compressed relative to the 70 to 80-year timelines we have seen for other industrial revolutions.

And because of this compression of time, companies are in a position where they have to either adapt now or they die.  This is not evolutionary.  It does not span three generations like other industrial revolutions have spanned.  This is not evolutionary.  It is revolutionary.  And this concept was already in motion but has been exacerbated by Covid. 

The second point is that there is no industry that is not touched by this revolution.  In the early 2000s, if you look back to the internet bubble, it was just all about the internet. It had no effect on financial.  No effect on the consumer.  Energy was untouched.  Healthcare was untouched.  It was just this tech bubble that we’ve known about.

This time, almost every sector is feeling the seismic change of this move to digitization.  Every sector must quickly adapt.  So that was the second point.  

The third point of the paper was to question whether value was about to outperform growth, as many kept asking.  And although the valuation spreads between value and growth were quite wide even then, it seemed as though to me that the spread could be justified in part because the terminal value of some of these traditional value businesses, which were being out-innovated we were beginning to question them. I was beginning to question them.  A great example is if you take a traditional retailer for example. Today, they may seem very cheap at 10 times earnings.  But what is the earnings power of that entity in five years?

So, business models are being disrupted at a rate we haven’t experienced.  And we believe when this happens, value becomes value traps.  And that is what we have seen in kind of the permanence of value underperforming over the last few years.

ALEX: Ankur, I wanted to mention the Alger 25 strategy, which incepted in 2018.  Can you tell us a little bit about that strategy, what makes it unique and how you manage it?

ANKUR: Yes.  Philosophically, I think it is a sibling to all the rest of our strategies.  So, it is not philosophically different in what we look for in businesses.

All I’m looking for is 25 of the best businesses in the market.  I seek to invest in businesses that adhere to having the characteristics of having compounding growth with duration.  They have great management team since the management teams are truly the stewards of the capital that we trust them with.

Businesses that have pricing power, businesses that have strong business models, which allow them to have things like pricing power and therefore margin expansion and free cash flow growth.  There’s always room in the portfolio for businesses that are more opportunistic in nature, where the risk reward is highly compelling and where they have aspects of the other characteristics.  

But maybe it’s a fallen angel or the opportunity in the market is so big that there’s a tiny share that they’re taking today.  So, the opportunity is just big.  We’d call that a more opportunistic buy.

It’s actually an exciting and fun strategy to run because the large weightings in almost every position makes each one highly impactful to the portfolio.  Their turnover tends to run a little bit lower.  The sector weights can vary greatly because again all we’re looking for is great businesses regardless of a sector.

Yes, sometimes people ask me, well, how is it different running this portfolio versus a more diversified portfolio?  And I think sometimes the hardest part here is deciding which of the names should hold a position in the portfolio because there’re so many different businesses that have unique characteristics and that are great businesses.  It has been a really interesting journey on this 25- stock highly focused portfolio.  

ALEX: Ankur, I want to talk a little bit about your research process and the adjustments that you and your team have made over the past year, as you’ve all moved to working from home.  Has the process been significantly different that it was before?

ANKUR: I would say first of all our research process and our team dynamic is no different than it has been before.  And what has been incredibly surprising was how seamless this process has been.  It is remarkable that all of us are sitting at home right now.  

So, in terms of the research, it’s funny because the core of our research isn't changing.  We’re still doing the same processes of customer calls; we talk to the management.  For a duration of April, May, June, July, managements were actually proactive because they themselves didn’t know what was going on in their businesses.

So, they were proactively doing update calls.  So, we did get more information than management usually allows for us to have mid-quarter.  And they would publicly state their numbers as to how the month to month was trending.

In terms of management access, it has been quite interesting because it does make me question all the travel that was accompanied for getting that management access sometimes, whether it was going to conferences in Florida or California or wherever they might be in order to meet with management teams.  

Now, what we do miss is–I personally know a lot of these management teams from the years of covering the stocks and interfacing with them on a face-to-face basis.  So, I don’t know how you truly understand that kind of person that they are to lead the business, the culture that they carry if you’re not having some face-to-face interaction.  But for the most part, management teams have been accessible.  

They actually prefer it since they don’t have to go anywhere to meet with us.  They don’t have to socialize with any of the investors or answer these questions over and over again in a hotel room.  You know what you see around the hotel desk at a hotel room and they keep answering questions and at the end of the day they’re completely bored.  But a lot of them are appreciating the fact that they can reach investors in a way that’s less difficult. 

So, I do think there’s going to be some real change in our industry.  And it does make you question how inefficient we might have been.

ALEX: Ankur, one final question.  Has your investment philosophy evolved at all over the past six months? 
 
ANKUR: We have been steeped in looking for change for 55 years.  And if you go back to the magazine articles that David and Fred were interviewed in back in the ‘70s, the ‘80s, the ‘90s, they say the same thing.  Look for Positive Dynamic Change.  Look for high unit volume growth.  Look for change.  Where there is change, there is opportunity.  The market often underestimates change.

And that is how we think about the market.  We are not changing ourselves to suit the market.  This is what we had been built for.  This is what we have been trained to do.  This is our core competency, is looking for change. 

And what we see over the next 10 years is so much change in the market you want to really be relying on people who can recognize that change.  

What I want to leave you with is that we are a pretty competitive team that likes to win.  And we like to win for our clients.  And it’s really important for us.  We always know who it is that we’re investing for.  And we don’t take it lightly.

ALEX: Ankur, thanks so much for talking with me this afternoon.
ANKUR: Thank you.

ALEX: And thank you for listening.  For more information on Alger strategies, including Alger 25, and for our latest market insights, please visit alger.com.​
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