Alger Mid Cap Growth Savors Change
Thursday September 6, 7:00 pm ET
Jonah Keri
The chip industry is nearly a decade past its prime. The subprime mess has turned the financial sector into a volatile question mark.
Into the fray jumps Dan Chung, manager of Alger's Mid Cap Growth Fund (NASDAQ:AMCGX - News).
"This is a terrific time for research-oriented stock picking," said Chung. "The global opportunities are quite different now than they were 10 years ago."
Opportunistic defines Chung's approach in a nutshell. The fund manager oversees $2.2 billion in assets between the retail and institutional versions of the mid-cap growth fund.
Most of those dollars go toward companies that show dramatic positive changes in products, management or market positioning.
The fund's method has yielded strong results. It was up 18.55% this year going into Thursday, putting it among the top 6% of all mid-cap growth funds tracked by Morningstar. Its peers averaged an 11.38% gain and the S&P 500 was up 5.12%.
For the past three years, the fund cranked out an average annual gain of 18.7% vs. 15.88% for its peers and 11.81% for the S&P.
Chung and co-manager Andrew Silverberg don't hang around in stocks not pulling their weight. Portfolio turnover tops a brisk 270% a year.
Chung loves some semiconductor stocks. A white-hot industry in the 1990s, most chip companies' growth rates are well off peak levels.
But a few semis have taken advantage of a changing environment, reaping the benefits with improved earnings and stock price gains.
Consolidation in the industry has shifted the strategy away from one-stop shops toward a few leaders specializing in a specific aspect of the chip production cycle.
Alger owns Lam Research (NasdaqGS:LRCX - News) and Varian Semiconductor Equipment Associates (NasdaqGS:VSEA - News). Lam makes etching devices, while Varian makes ion implanters.
Niche Snatchers
Where before a larger chip company like Applied Materials (NasdaqGS:AMAT - News) might've tried to muscle into those fields, now the big boys are exiting, clearing the way for midsize players to grab market share.
The shift makes perfect sense, Chung says, when you consider the economic factors at stake. "These are very expensive pieces of machinery," he explained. "It takes millions of dollars to make them, and it takes millions and millions to do the R&D work to get to that point."
So when a company like Varian takes the lead in the field of ion implanters, that means there's a lot of catching up for others to do to get that market share back.
Varian is one of the highest rated stocks in the IBD universe, with a best-possible Earnings Per Share Rating of 99 and a 98 Relative Price Strength Rating. The stock is up 86% year to date.
Lam Research owns a 98 EPS Rating, with triple-digit earnings growth in three of the past four quarters. The stock has pulled back lately, but has maintained a 78 RS Rating. Those two chip stocks make up a chunk of the fund's big weighting in tech.
Eschewing enterprise software makers that may be past their prime, Chung has pursued companies that are willing to take chances and reinvent their industry.
Nintendo has done just that with its Wii game console. While other console makers still woo the typical high-end gamer with brighter graphics, the Wii has changed the way gaming works by letting users mimic the action of running, jumping or swinging a baseball bat. That shift could bring in not only the usual 18- to 35-year-old males, but also females, Chung says, potentially doubling its market, or more.
"Now people are saying, 'Wow, when I play the boxing game, I'm getting some exercise,'" he said. "We're not far from answering the question, 'What happens when video games become good for you?'"
All told, the fund has about 30% of its assets in tech stocks. Chung says that overweighting differs from the ratio seen among the broad market indexes and many other top mutual funds. Not that he's concerned -- quite the opposite.
"We follow opportunities wherever they may lead," Chung said.
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