In a recent episode of Behind the Ticker, Brad Neuman, Director of Market Strategy and Portfolio Manager at Alger, joined the show to discuss the firm’s rich history in growth investing and the launch of their latest ETF: Alger Russell Innovation ETF (ticker: INVN). Neuman, who has a 25-year investment background spanning bottom-up and top-down roles on both the buy and sell sides, explained how Alger’s philosophy of “positive dynamic change”—a principle rooted in identifying growth opportunities amid market disruption—has remained consistent since the firm’s founding in 1964.
About Brad Neuman and Alger
Neuman described Alger’s long-standing emphasis on change as the foundation for identifying outperforming businesses. This philosophy is implemented through deep, fundamental research conducted by a seasoned analyst team that conducts proprietary field work—speaking directly with customers, competitors, and suppliers. While most of Alger’s strategies have been actively managed and bottom-up, INVN marks a shift toward a more systematic, top-down process designed to isolate innovation as an investable factor.
Investment Strategy and Approach
The INVN ETF seeks to directly invest in innovation by identifying companies with strong R&D investment that is underappreciated by the market. Starting with the Russell 1000, Alger removes the bottom third of companies ranked by free cash flow margin to avoid early-stage or inefficient businesses. From the remaining universe, they select the top 50 companies based on R&D-to-enterprise value. The result is an equally weighted portfolio reconstituted quarterly to maintain exposure to what Neuman calls “HIPP” stocks—Highly Innovative, but Prudently Priced. This approach avoids overlap with typical growth benchmarks and excludes megacap names like Apple, whose R&D may be large in absolute terms but not relative to their vast market caps.
Neuman positioned INVN as a mid-cap core exposure that can serve as a replacement for traditional passive or active mid-cap strategies, while solving for issues like overconcentration in large-cap tech and inflated market valuations. With low turnover, high active share, and a valuation profile significantly below traditional growth indices, INVN provides a unique, quant-driven solution for investors looking to allocate directly to innovation.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Brad Neuman covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
We invest in research and development, companies have a lot of research and development that's being undervalued by the market. So it's research and development relative to market value. So maybe it's helpful now if I take you through just the whole methodology. It's not that's complicated, but so we start with the Russell 1000. And we first really do two things to Russell 1000 to get down to the portfolio. We first weed out the bottom, one third, a free cash flow margin companies.
That doesn't mean it's not a great company, or even a good stock. It's just that the model wouldn't say that its research development is undervalued. So the average, the weighted median research and development rather from market value in the ETF, is about 6%. So if you're talking about these $3, $3, $3 companies, they are very innovative. But in my spend, tens of billions of dollars on research and development, but they don't spend what's necessary relative to their market cap, which in this case would be $1,580 billion to get them included in the index.
Market Context and Positioning
So we share with Russell 1000, we're left with the top two thirds of free cash flow margin companies. From those companies, within those companies, we simply write them all by research and development spending over the past 12 months relative to their market value, or to get technical enterprise value, which is the market capitalization of the equity plus the value of the debt plus minority interest and preferred stock less cash, but essentially the market value of the company.
Well, one of the beautiful things about in my opinion, the index and the ETF that follows it is that it has been created. It has very well overlapped with the benchmarks and, you know, I think most people will find some relatively significant portion of the magnificent 70th portfolio today. This has, you know, a high 90s active share percentage, meaning more than 90, you know, high 90% of the strategy or ETF is different. Then the benchmark, whether you look at the S&P 500, the NASDAQ composite, the Q's, the Russell 1000 growth and any of those things, so it's really different.
our companies, the way I'll think of this innovative, is because we are using that research development relative to market value. So Apple may be innovative, although I would argue that their innovation is very visible. Everyone knows they're going to come out with another phone. Every September, and most of the value of the company is actually based on its existing products. So I wouldn't say in the model wouldn't say that Apple is under value based on its research development pipeline.
Notable Insights
"Our belief is that this is a much longer term signal, the innovation factor, and so we don't have to turn the portfolio over very much, that's why it's only quarterly."
Key Takeaways
- While most of Alger’s strategies have been actively managed and bottom-up, INVN marks a shift toward a more systematic, top-down process designed to isolate innovation as an investable factor.
- The INVN ETF seeks to directly invest in innovation by identifying companies with strong R&D investment that is underappreciated by the market.
- Neuman positioned INVN as a mid-cap core exposure that can serve as a replacement for traditional passive or active mid-cap strategies, while solving for issues like overconcentration in large-cap tech and inflated market valuations.
- With low turnover, high active share, and a valuation profile significantly below traditional growth indices, INVN provides a unique, quant-driven solution for investors looking to allocate directly to innovation.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Brad Neuman highlights important considerations around quantitative investing. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of quantitative investing and growth investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Brad Neuman, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.