Brad Neuman, Alger

Sure. Well, I've done a lot of things in my 25-year career. I've been an investor and managing money and an analyst. I've also been a sell-side publishing analyst. And I've done those things both bottom-up, so analyzing companies, one by one, as well as top-down from a systematic or strategic, big picture. So I started off working on the sell-side doing equity research in home building and housing products and wireless telecommunications. And then I worked for a couple of chief investment strategists at a large sell-side bank.

Yeah, and that's what we're going to be talking about today. I want to dive into, that product specifically. But before we get too in the weeds and too into the business, any hobbies? What do you like to do when you're not working?

Well, I have three young kids, so they keep me busy. I do like tennis a lot, and actually they're involved in tennis. So it's me playing plus me coaching them and shuttling them around to different tournaments and stuff like that. So that keeps me busy. I'm also kind of obsessed with anything, activities on the water and being on the water. And so kayaking, paddleboarding, boating, all that kind of stuff. So, yeah, that's pretty much it.

Yeah, it seems to be the most recent set of answers when I ask this question is everybody has young kids and they seem like they're just shuttling them around. Seems to be the hobby of most these days. But so can we talk about Algor as a whole? Like you do more than just ETFs. You guys have a – I was looking at your website. You have a lot going on there. So can you just talk about all the things that you guys are doing for clients on a day-to-day basis?

Sure. So, Algor's been around for over 60 years. We were founded in 1964, one of the pioneers of growth equity investing. Always been kind of on the leading edge of innovation. And, our business, which is, we manage about $25 billion in assets, is split between institutions and retail. And so, on the institutional side, it's endowments and pension funds, things like that. And then on the retail side, we generally sell through financial advisors.

So can you talk about, maybe the overall investment philosophy of the firm? Like how do you guys approach, building portfolios, building strategies? Is there kind of an overall theme or mantra as a firm that seems to kind of flow through everything you do?

Yeah. So thankfully, we've had one philosophy that's been in place for, like I said, over 60 years. And we haven't had to modify it. And it's called positive dynamic change. So this is Fred Alger's philosophy when he founded the firm. Essentially, where there's change, there's opportunity. And, opportunity is a big driver. I think of the big drivers about performance as opportunity times skill. So it's not just how skilled you are. It's also where there's a lot of dispersion of potential returns that you can outperform. And so change, areas of change are where there's a lot of dispersion of returns.

That's interesting. So just kind of staying on that for a little bit. Are you using, I guess, like some fundamental screening factors to identify those types of opportunities and find where that change is occurring? Or like how are you guys doing your analysis to really pinpoint those opportunities for the portfolios?

So the way we do it and have done it for 60 years is generally bottom-up fundamental investing. So we've got a whole team of analysts that are experts in their industries. And we do a lot of proprietary fieldwork. So we talk to customers, suppliers, competitors. I wish there was a simple formula for how we did it. But if it was, then it could be duplicated. It's, think about, your favorite sports analogy, a football game. the best football team, yes, they have talented players. But a lot of it comes down to just, the executing, the practice, all the little things coming together.

And, yeah, I do have that on the list. I saw that as I was kind of doing some due diligence on the fund. And so let's talk about the Alger Russell Innovation ETF. The ticker is INVN. So can you talk about what inspired the creation of this ETF and really what gaps are you trying to fill in the market?

Yeah. Well, I think it's really unique. And I think there's a huge gap in the market. So that's the exciting part. So first off, innovation is more important than ever before. We think the speed of disruption is accelerating. So innovation is really important. And there's kind of two ways that I think investors can try to invest in innovation. One is, the bottom-up fundamental way that we talked about. And two is try to figure it out in a systematic approach rather than an idiosyncratic approach. So in other words, come up with some kind of methodology that invest in innovation, we'll say, is a factor.

So when you kind of think about innovation as like this investable theme, how are you simply avoiding just like buying the hype or overpaying for excitement? You think about, most recently it was just AI chips, right? And I looked at the portfolio and kind of how it's constructed and it's not constructed that way. So how are you as a firm or you as a portfolio manager thinking about this theme, which is innovation?

Well, one of the beautiful things about, in my opinion, the index and the ETF that follows it is that it has very little overlap with the benchmarks. And, I think most people will find some relatively significant portion of the Magnificent Seven in their portfolio today. This has, a high 90s active share percentage, meaning more than 90, high 90% of the strategy ETF is different than the benchmarks, whether you look at the S&P 500, the Nasdaq composite, the Qs, the Russell 1000 growth, any of those things. So it's really different.

So you talked a lot about different metrics that the index uses, such as free cash flow margin, R&D to enterprise value ratios to help kind of like select these companies. Why are those metrics so important to really identify innovation? Like why is that really key here?

So, there's been a lot of academic research on this, that research and development companies with strong research and development have gone on to have strong sales and earnings growth. And, that's in the public domain, several papers that have been published about that. And so, um, Brook Lev in particular at NYU, um, has, has come up, come out with some of those findings. And so, um, so research and development is, we think, indicative of, um, new products and services that, um, may be, uh, commercially successful.

Yeah, no, it makes a lot of sense to me. I couldn't imagine, uh, spending $180 billion on R and D. Um, but the fund is, uh, equally weighted. And so what was the decision going into that to kind of, instead of to equal weight, uh, all these selections rather than maybe a more traditional market cap weighted, uh, approach?

Well, um, we did a lot of work on, it's, it's really the factor, the innovation factor, the research and development enterprise value that we believe, um, is the signal here. And so, um, simply having a larger market capitalization doesn't make that, signal or score on that metric any better. So, um, that's one reason, uh, why we wouldn't do it. We really just want to have broad exposure to that innovation factor, as I would call it. And the best way to do that, make sure you get that is through equal weighting. Um, we also, one of the beautiful things about, uh, the strategy also is that you don't have to, many other factors, if you can find a factor that works, um, many factors only work for a short time.

And just out of curiosity, like how, how often are you, uh, turning over the portfolio or rebalancing?

Yeah. So it's just once a month, uh, once a quarter, I should say, sorry, four times a year. Um, on average, it's about eight stocks that, um, enter and exit, uh, on that quarterly basis. But, um, and we've only launched it, uh, this past January. So, um, that eight stocks is just, if you, if you went back and looked at it historically, um, using this methodology, but, um, we've only had one rebalance so far in March. And there was four stocks that, um, entered and exit the portfolio.

So innovation and thematic, innovation ETFs, we've seen a lot of launches, whether they're passive, whether they're active. So what would be, kind of the main differentiators between your product and some of the other thematic innovation ETFs that we've seen at the market more, uh, more recently?

So I would say almost all of the ones that you're talking about are, um, qualitative rather than quantitative. They're things that people think are innovative. Um, and, uh, this is quantitative and systematic. And I think that has, a lot of advantages. Um, one of them is just that the story doesn't have to, um, get out and be told to, investors. The CEO doesn't have to get on the road. This strategy can simply evaluate where there's a lot of research and development, um, in a company that's been, um, that's generating free cash. Uh, where there's a lot of research and development, it's not, um, being valued a lot by the, uh, by the market.

So if you're, sitting down, you're having a conversation with an advisor, they, they have their, firm's model portfolio. Um, how would you position this ETF? Um, where would you put it in terms of allocation? Would you compliment it with someone or something like, how would you, uh, fit this in kind of an already diversified model portfolio?

So the easy answer to have it match, um, just, to the traditional thought process, uh, of most investors is this thing, this, uh, strategy maps to mid cap core. So it has elements of value and growth. Um, again, it's an, it's something new, it's, it's innovation. So I don't know that, like say the Morningstar style box defines it correctly, but if you're going to use the traditional Morningstar style box, it maps to mid cap core. Uh, we think it can be a replacement for, uh, some of your, uh, either mid cap core, uh, active strategies or maybe more in particular, uh, passive strategies in that it solves a couple, I think of, uh, the passive problems that people have now, which is one over exposure or concentration to large cap tech.

Yeah, no, I, I think you guys, the timing here is, is really good. mid and small has been unloved, as you said, large cap is largely, uh, dominated. Large cap tech is largely dominated, uh, for the better part of, uh, geez, maybe three years now. Um, and so some of that mid cap exposure as well as some equal weight, um, since it is kind of a relatively newer ETF, as you said, it launched in January. Um, how are you, uh, as a firm kind of thinking about, um, marketing and distribution and getting this in front of people? Cause, um, that tends to be the hardest part as, uh, as we launch new ETFs.

Yeah. Well, you probably know all about this, um, probably better than me. Um, uh, like I said, Aldra had grown up around, um, uh, mutual funds and, um, that was, uh, that has been our, our kind of, uh, bread and butter on the retail side. Obviously we do a separately managed accounts, et cetera, on institutional side, but on the retail side, it had been mutual funds. And we have huge presence in, um, a lot of the large wire houses. When you start an ETF from scratch, as we did just a few months ago, um, a lot of those wire houses want, longer track records or, uh, significant AUM that's not possible from day one. So, uh, we have to market, uh, this ETF and our other ETFs more to, uh, RIAs and, uh, kind of independent advisors.

Yeah. Well, Brad, I really appreciate you spending some time with me before I let you go. Where can people learn more about the firm and get information on your ETFs?

Yeah. So I would definitely encourage people to go to aldra.com. Um, you can, uh, find, uh, this strategy, a link to this strategy there. Uh, if you go on the, uh, strategies tab, um, you can also find a lot of other, um, uh, leadership that we've done under the insights tab. So there's plenty there. Um, and, and there's a video, uh, where I walked through, uh, the methodology, et cetera, and, and, uh, how this strategy came to be on the website, on the product page.

Well, again, uh, Brad, thanks for being here with me today.

Thanks so much for having me. It was great.

We'll see you next time.