Dan Chung: The Search for Innovation
November 14, ​2018
At Alger our analysts and portfolio managers search across the market capitalization spectrum for highly innovative companies. We do not believe the “megacap” leaders, such as Amazon, Alphabet, Apple, ADP and Visa, are the only pioneers of innovation worth watching. Innovation is also prevalent among smaller businesses that are not as widely followed. Such companies can grow rapidly by focusing on and dominating in vertical segments or “niche” opportunities within their industries. Often they are the quickest to innovate and offer new, important services that megacap companies either do not offer or are slower to develop.

In this blog I discuss how human resources (HR) and financial operations and compliance are two areas in which smaller companies are excelling by developing new software and data-driven processes. In future blogs, I intend to discuss other industries, such as digital advertising, electronic payments, pharmaceuticals and manufacturing automation, in which smaller companies are also succeeding by embracing innovation. In the HR space, recruitment, compensation, training, performance measurement and talent management have historically been highly fragmented within companies, at least in terms of the processes and technology used within each area to track and process a company’s employees—old and new. Recordkeeping has been paper based or kept in disparate spreadsheets, rather than in a single database, accessible across an organization’s users with a consistent interface. Consequently, searching and analyzing information at a company, even related to its own employees’ work histories, have been extremely cumbersome. For example, if a manager of a company wants to evaluate internal candidates to fill an open position abroad, collecting information on tenure, performance, training, compensation, willingness to relocate and foreign language skills can be very difficult.

To address those challenges, firms such as Ultimate Software, Paylocity Corporation and Paycom Software offer cloud-based technology that enables centralized and searchable digital HR records on each employee’s entire employment lifecycle. The technology also automates various HR functions including the processing of applications. Rather than complete paper applications, potential recruits use online forms so that hiring companies can easily capture, search and analyze the new information. In another HR function, firms are developing artificial intelligence that can help improve employee retention. The technology analyzes data from onboarding, such as employment applications and personality profiles, and information from performance reviews including reviews by supervisors, peers, and subordinates. The data analysis then suggests the best strategies for motivating employees. Some workers may prefer to work closely with teams while others may excel in more solitary environments. Artificial intelligence can also help firms match forms of compensation to employees’ interests, such as paid vacation time, tuition reimbursement, benefits and income. WageWorks, meanwhile, has automated the administration of commuter benefits, flexible spending accounts and other tax-advantaged programs, further facilitating HR functions. As small and nimble companies create innovative products, they are competing against incumbents such as Ceridian Corporation and Paychex.

​Smaller innovative companies are also taking advantage of advances in artificial intelligence because AI can handle mundane or routine tasks currently handled by humans. Back office functions in financial services, which include administration, compliance and various transactional recordkeeping functions, are a prime opportunity for technology to improve efficiency, decision making and service levels. AI can also improve front office functions such as risk assessment and credit scoring. As an example, Q2 Holdings is generating strong growth by offering services for credit union operations to offer a full range of digital banking solutions while Ellie Mae. is disrupting the traditional mortgage origination process. Its product streamlines and automates the origination and funding of new mortgages and facilitates regulatory compliance. As smaller companies develop new technology, they are challenging incumbents, such as IBM and Oracle, and they are driving businesses to outsource systems that have been maintained in-house. ​

Alger’s analysts are sector experts who continually research industries across all levels of the competitive landscape—from megacap to small cap. We search for disruptive companies and Positive Dynamic Change to identify ingenuity on all levels and potentially benefit from the investment opportunities that it brings.

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. as of November 2018. 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 strategies 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.

Risk Disclosure:  Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies’ securities have historically been more volatile than other securities due to increased competition, government regulation, and risk of obsolescence due to the progress of technological developments.  

The following positions represented the noted percentages of Alger’s assets under management as of October 31, 2018: Amazon.com, 6.2%; Alphabet Inc., 4.2%; Apple Inc., 4.1%; Automatic Data Processing, Inc., 0.3%; Visa, 3.9%; Ultimate Software Group, Inc., 0.1%; Paylocity Holding Corporation, 0.2%; Paycom Software, Inc., 0.2%; WageWorks, Inc., 0.3%; Ceridian, (0.0%); Paycheck, (0.0%); Q2 Holdings, Inc., 0.1%; IBM, (0.0%); Oracle; (0.0%); and Ellie Mae, Inc., 0.1%.​

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