Making smart bets on small-and mid-cap growth stocks

propelled three funds.

By TIM GRAY

T hree of the first quarter’s top- performing mutual funds won big by favoring small- and midcap growth

stocks, toting up quarterly returns of 25 percent or more.

Virtus Zevenbergen Innovative Growth Stock Fund

The Virtus Zevenbergen Innovative Growth Stock Fund buys shares of companies of all

sizes — its largest holding lately has been Amazon — but its big winners, so far this year, have been smaller fare such as Way-Fair, an online seller of home furnishings, and the Trade Desk, an online advertising marketplace.

Nancy A. Zevenbergen, the fund’s lead manager, said her interest in growth stocks dates to the ’80s. She worked then in the trust department of a Seattle bank and followed — and was fascinated by — the 1986 initial pub-lic stock sale of a homegrown outfit named Microsoft. (Microsoft is based in the Seattle suburb of Redmond, Wash.) A year later, she started Zevenbergen Capital Investments in Seattle. Her mutual fund began in 2004.

Being on the West Coast has proved an advantage, she said. Not only has Seattle

birthed tech giants like Microsoft and Amazon, but “Silicon Valley is a day trip for us,” she said.

Throughout her career, she has sought stocks she thinks can keep increasing revenue by at least 15 percent a year. Her mantra is: “Revenue growth, revenue growth, revenue growth,” she said.

Favorite holdings can stay in the fund for years: Mercadolibre, an Argentine e-com-merce outfit, has been there for a decade. That stock was lately one of only 31 in the fund, compared with 157 for the average actively managed United States stock fund tracked by Morningstar.

Ms. Zevenbergen says she prefers compa-nies that are run by their founders. As an ex-ample, she pointed to Microsoft. The stock

KYLE JOHNSON FOR THE NEW YORK TIMES

Nancy A. Zevenbergen, the lead manager of the Virtus Zevenbergen Innovative Growth Stock Fund.

Riding Small Companies to Big Returns

“All the News That’s Fit to Print” Reprinted With PermissionSUNDAY, APRIL 14, 2019

BUSINESS

soared while one of the founders, Bill Gates, steered the company but languished under his successor, Steven A. Ballmer. What’s more, boards of directors are typically not as patient with outsider C.E.O.s, and long-term investments require patience, she said.

Her liking for founder-led outfits is part of the reason her fund has owned Tesla, the electric-car maker led by Elon Musk, since its 2010 initial public stock offering. Despite Tesla’s recent operational problems, she said: “Elon Musk is doing things people said couldn’t be done — and he’s up against an old, established industry and organized labor.”

Ms. Zevenbergen added: “You can often get a C.E.O. with an M.B.A. from Harvard, but do they have the passion to run the business that the founder had?”

The Virtus Zevenbergen fund, whose A shares have a net expense ratio of 1.25 percent, returned 25.24 percent in the first quarter, compared with a total return of 13.65 percent for the S&P 500 stock index.

Alger SMid Cap Focus Fund

Matthew A. Weatherbie, one of the manag-ers of the Alger SMid Cap Focus Fund, has been chasing growth stocks even longer than Ms. Zevenbergen.

His investment career began in the ’70s, and he ran Putnam Voyager, then a well-known fund, starting in 1983. He left Put-nam to start his own investment company

in 1995, and he has managed the Alger fund since 2017. (Alger Associates acquired Mr. Weatherbie’s company in 2017.)

Like Ms. Zevenbergen, he said his invest-ment philosophy has remained consistent.

“There have been some tweaks over time, but the basic process is the same,” he said. He and his co-managers seek companies in a growth sweet spot, he said. “They’ve been in business long enough to survive the perils of infancy, but they’ve got a long runway of growth ahead of them.”

Holdings also must have “a competitive moat around the business, a strong balance sheet, high inherent profitability and a high-quality management team,” he said.

To assemble the portfolio, the fund’s managers and analysts collaborate to iden-tify 50 holdings that meet these criteria. Mr. Weatherbie and his co-portfolio managers — H. George Dai and Joshua D. Bennett — next take an unusual step.

They divide the portfolio into three bas-kets. The managers then independently evaluate the 50 stocks, each determining the portion of the fund’s assets dedicated to each stock in his basket. As a result, the fund’s largest stakes are the stocks most fa-vored by all three.

“Why is Chegg or FirstService a top five holding?” Mr. Weatherbie asked. “Because each of us has determined that those are high-conviction names.”

Chegg is an education-services company, while FirstService is a property manager and service provider for condos and cooperatives.

Mr. Bennett said both companies exem-plify something the managers hunt for: They’re fast growers in “mundane mar-kets” not associated with zippy stocks in the way, say, consumer electronics and online entertainment are. Mr. Weatherbie added: “Our process enables us to identify hidden gems in mundane industries.”

The Alger fund, whose A shares have an expense ratio of 1.33 percent, returned 30.58 percent in the first quarter.

Lord Abbett Developing Growth Fund

F. Thomas O’Halloran, the lead manager of the Lord Abbett Developing Growth Fund, seeks companies that show both disruption and momentum. For example, he has won lately with such well-known names as Yeti Holdings, the maker of insu-lated cups and coolers, and Roku, the video streaming outfit.

These companies are disrupting their industries, he says, and their shares have lately trended upward.

Take Roku and its streaming devices, which compete with ones sold by such tech behemoths as Apple and Amazon. “It’s not that one form of streaming is better than another,” Mr. O’Halloran said. “It’s that streaming is better than cable and regular TV, and Roku is the only Swiss-neutral plat-form.” Other devices are interwoven with technologies or business models peddled by their sellers.

Mr. O’Halloran said he often finds prom-ising picks among consumer stocks for the simple reason that consumer purchases drive growth in the United States. “That’s where 70 percent of spending in U.S. econo-my is,” he said.

When considering what to wager on, Mr. O’Halloran said, he prefers companies with hefty potential markets — like Yeti. “The whole planet likes its food and beverages at the right temperature,” he said.

He differs from some portfolio managers in that he bars members of his analyst team from writing reports on the companies they follow, relying instead on quick emails and frequent meetings.

Churning out reports can lead to delays and self-defeating behavior, he said. “By the time you get a report done, a quarter to half of the stock move may be over. And when the stock peaks, you don’t want to let it go, because you wrote the big report on it.”

Mr. O’Halloran’s fund, whose A shares have an expense ratio of 0.93 percent, re-turned 27.13 percent in the first quarter.

(#S071970) Copyright © 2019 by The New York Times Company. Reprinted with permission. For subscriptions to The New York Times, please call 1-800-NYTIMES.Visit us online at www.nytimes.com. For more information about reprints and licensing visit www.parsintl.com.

C M Y K Nxxx,2019-04-14,BU,014,Bs-4C,E1

14 BU N THE NEW YORK TIMES, SUNDAY, APRIL 14, 2019

Three of the first quarter’s top-performingmutual funds won big by favoring small-and midcap growth stocks, toting up quar-terly returns of 25 percent or more.

Virtus Zevenbergen Innovative GrowthStock FundThe Virtus Zevenbergen InnovativeGrowth Stock Fund buys shares of compa-nies of all sizes — its largest holding latelyhas been Amazon — but its big winners, sofar this year, have been smaller fare such asWayFair, an online seller of home furnish-ings, and the Trade Desk, an online adver-tising marketplace.

Nancy A. Zevenbergen, the fund’s leadmanager, said her interest in growth stocksdates to the ’80s. She worked then in thetrust department of a Seattle bank and fol-lowed — and was fascinated by — the 1986initial public stock sale of a homegrown out-fit named Microsoft. (Microsoft is based inRedmond, Wash.) A year later, she startedZevenbergen Capital Investments in Se-attle. Her mutual fund began in 2004.

Being on the West Coast has proved anadvantage, she said. Not only has Seattlebirthed tech giants like Microsoft and Ama-zon, but “Silicon Valley is a day trip for us,”she said.

Throughout her career, she has soughtstocks she thinks can keep increasing reve-nue by at least 15 percent a year. Hermantra is: “Revenue growth, revenuegrowth, revenue growth,” she said.

Favorite holdings can stay in the fund foryears: Mercadolibre, an Argentine e-com-merce outfit, has been there for a decade.That stock was lately one of only 31 in thefund, compared with 157 for the average ac-tively managed United States stock fundtracked by Morningstar.

Ms. Zevenbergen says she prefers com-panies that are run by their founders. As anexample, she pointed to Microsoft. Thestock soared while one of the founders, BillGates, steered the company but languishedunder his successor, Steven A. Ballmer.What’s more, boards of directors are typi-cally not as patient with outsider chief exec-utives, and long-term investments requirepatience, she said.

Her liking for founder-led outfits is part ofthe reason her fund has owned Tesla, theelectric-car maker led by Elon Musk, sinceits 2010 initial public stock offering. DespiteTesla’s recent operational problems, shesaid: “Elon Musk is doing things peoplesaid couldn’t be done — and he’s up againstan old, established industry and organizedlabor.”

Ms. Zevenbergen added: “You can oftenget a C.E.O. with an M.B.A. from Harvard,but do they have the passion to run the busi-ness that the founder had?”

The Virtus Zevenbergen fund, whose Ashares have a net expense ratio of 1.25 per-cent, returned 25.24 percent in the firstquarter, compared with a total return of13.65 percent for the S&P 500 stock index.

Alger SMid Cap Focus FundMatthew A. Weatherbie, one of the manag-ers of the Alger SMid Cap Focus Fund, hasbeen chasing growth stocks even longerthan Ms. Zevenbergen.

His investment career began in the ’70s,and he ran Putnam Voyager, then a well-known fund, starting in 1983. He left Put-nam to start his own investment companyin 1995, and he has managed the Alger fundsince 2017. (Alger Associates acquired Mr.Weatherbie’s company in 2017.)

Like Ms. Zevenbergen, he said his invest-ment philosophy has remained consistent.

“There have been some tweaks overtime, but the basic process is the same,” hesaid. He and his co-managers seek compa-nies in a growth sweet spot, he said.“They’ve been in business long enough to

survive the perils of infancy, but they’ve gota long runway of growth ahead of them.”

Holdings also must have “a competitivemoat around the business, a strong balancesheet, high inherent profitability and a high-quality management team,” he said.

To assemble the portfolio, the fund’s man-agers and analysts collaborate to identify50 holdings that meet these criteria. Mr.Weatherbie and his co-portfolio managers— H. George Dai and Joshua D. Bennett —next take an unusual step.

They divide the portfolio into three bas-kets. The managers then independentlyevaluate the 50 stocks, each determiningthe portion of the fund’s assets dedicated toeach stock in his basket. As a result, thefund’s largest stakes are the stocks most fa-vored by all three.

“Why is Chegg or FirstService a top fiveholding?” Mr. Weatherbie asked. “Becauseeach of us has determined that those arehigh-conviction names.”

Chegg is an education-services company,while FirstService is a property managerand service provider for condos and cooper-atives.

Mr. Bennett said both companies exem-plify something the managers hunt for:They’re fast growers in “mundane mar-kets” not associated with zippy stocks in theway, say, consumer electronics and onlineentertainment are. Mr. Weatherbie added:“Our process enables us to identify hiddengems in mundane industries.”

The Alger fund, whose A shares have anexpense ratio of 1.33 percent, returned30.58 percent in the first quarter.

Lord Abbett Developing Growth FundF. Thomas O’Halloran, the lead manager ofthe Lord Abbett Developing Growth Fund,seeks companies that show both disruptionand momentum.

For example, he has won lately with suchwell-known names as Yeti Holdings, themaker of insulated cups and coolers, andRoku, the video streaming outfit.

These companies are disrupting their in-dustries, he says, and their shares havelately trended upward.

Take Roku and its streaming devices,which compete with ones sold by such techbehemoths as Apple and Amazon. “It’s notthat one form of streaming is better than an-other,” Mr. O’Halloran said. “It’s thatstreaming is better than cable and regularTV, and Roku is the only Swiss-neutral plat-form.” Other devices are interwoven withtechnologies or business models peddled bytheir sellers.

Mr. O’Halloran said he often finds prom-ising picks among consumer stocks for thesimple reason that consumer purchasesdrive growth in the United States. “That’swhere 70 percent of spending in U.S. econ-omy is,” he said.

When considering what to wager on, Mr.O’Halloran said, he prefers companies withhefty potential markets — like Yeti. “Thewhole planet likes its food and beverages atthe right temperature,” he said.

He differs from some portfolio managersin that he bars members of his analyst teamfrom writing reports on the companies theyfollow, relying instead on quick emails andfrequent meetings.

Churning out reports can lead to delaysand self-defeating behavior, he said. “By thetime you get a report done, a quarter to halfof the stock move may be over.

And when the stock peaks, you don’t wantto let it go, because you wrote the big reporton it.”

Mr. O’Halloran’s fund, whose A shareshave an expense ratio of 0.93 percent, re-turned 27.13 percent in the first quarter.

Making smart bets on small-and mid-cap growth stockspropelled three funds.

By TIM GRAY

KYLE JOHNSON FOR THE NEW YORK TIMES

Nancy A. Zevenbergen, the leadmanager of the VirtusZevenbergen InnovativeGrowth Stock Fund.

THE NEW YORK TIMESSource: Morningstar Direct

J F MJ F M J F M

Virtus Zevenbergen Innovative Lord Abbett Developing GrowthAlger SMid Cap Focus

Lord Abbett Developing GrowthVirtus Zevenbergen Innovative Alger SMid Cap Focus

How three of the better performers of the first quarter of 2019 fared against the market — and against their peer groups of funds.

FIRST-QUARTER RETURNS

Small-cap growthMid-cap growthLarge-cap growth

+18.1%

+27.1%

+16.0%

+25.2%

S. & P. 500

TOTAL RET.

S. & P. 500

TOTAL RET.

S. & P. 500

TOTAL RET.

+19.1%

+30.6%

Ahead of the Market

%+30

+20

+10

0

%+30

+20

+10

0

%+30

+20

+10

0

Riding Small Companies to Big Returns

In the never-ending tug-of-war betweengrowth and value investing, growth haslately been the strong-armed winner.

This year, through the first quarter, forexample, the Russell 1000 Growth Index re-turned over 15 percent, again better thanthe also excellent return of just over 11 per-cent for the Russell 1000 Value Index. Andgrowth outperformed value for seven of the10 years from 2009 through 2018.

Until the last decade, however, valuestocks often outperformed growth, leadingsome proponents of the value style of in-vesting to hope for a return to dominance.But there is no assurance that such a shiftwill happen soon.

Growth and value have specific mean-ings in the stock market: Value investing fa-vors stocks that look cheap using metricslike the price-to-earnings and price-to-bookratios. Growth investing, on the other hand,favors stocks with higher than average an-nual increases in revenue and earnings.

After months of rising stock prices,growth shares have become relatively ex-pensive but not outrageously so, JeremyZirin, head of Equities Americas at UBSGlobal Wealth Management, said. They car-ried a price-to-earnings premium of 47 per-cent over value stocks at the end of March.That’s high, he said, but nowhere near the100 percent premium that prevailed just be-fore the stock market declines of 2000 and2001. “We’re not at the stage where growth

is grossly overvalued,” he said.Investors can express their own growth

or value preference through a wide range ofexchange-traded funds. These include theInvesco QQQ E.T.F. and the iShares Russell1000 Value E.T.F. (Exchange-traded fundsare a form of mutual fund that is priced allday on stock exchanges, unlike traditionalmutual funds, which are priced only oncedaily, after the exchanges close.)

Tech stocks like Facebook, Amazon, Ap-ple, Netflix and Google, the so-called Faangstocks, are in the growth category. Despite abrutal stretch in late 2018, these stocks havebeen big stock market winners in the lastseveral years.

“The major tech companies have out-stripped expectations,” said John Reken-thaler, vice president for research at Morn-ingstar. “Earnings have maxed or exceededexpectations.”

Ed Yardeni, president of Yardeni Re-search, has been emphasizing growthstocks but said, “My contrary instincts sug-gest we may want to overvalue value rela-tive to growth.”

One reason is concern about the strengthof the global economy. “Generally, value hasoutperformed whenever there is anxietyabout whether the economy can continue togrow,” he said.

Value stocks typically come from indus-tries where investors and analysts seeproblems; that’s why the stocks are rela-tively cheap. The question is whether theproblems are real or overblown, andwhether future price gains are likely. Cur-rently, banks and other financial institu-tions, and oil and gas companies, make up alarge part of the value stock universe.

Judd Peters, one of the managers of the

Hotchkis and Wiley Small Cap DiversifiedValue fund, sees promise in both sectors.Banks will become more profitable whenlonger-term interest rates rise, increasingrevenue when banks lend money, he said.“We’re at an historically low moment interms of long-term interest rates,” he said.One of the fund’s holdings is First HawaiianBank, the largest Hawaiian bank, whichclosed the first quarter at what Mr. Peterscalled a “very attractive” valuation ofroughly 12 times current earnings.

Mr. Peters also says the valuations ofmany energy companies are unreasonablylow because oil prices dropped as techno-logical advances increased the supply of oilfrom shale. “Our view is production in-creases for U.S. shale producers cannot con-

tinue to grow fast enough to keep up withglobal demand growth,” he said. Mr. Peterssaid many shale producers had already ex-ploited the best opportunities and were dig-ging at “secondary sites that are more ex-pensive.”

On the other hand, fund managers whofavor growth investing can point to their re-cent performance records. Dan Davidowitz,for example, is manager of the PolenGrowth fund, which returned an annualized16.22 percent in the five years throughMarch 29, according to Morningstar.

Mr. Davidowitz says he looks for compa-nies that can increase revenue and earn-ings and beat the overall stock market. He isnot dissuaded by high share prices, he said,because they “can be overcome with excel-lent earnings growth, especially wherethere is a big competitive advantage.”

Still, the high prices of growth stocksshouldn’t be disregarded, some analystssay.

“The gap between high-priced and low-priced stocks has been rising for manyyears,” said Paul Quinsee, the global head ofequities at JP Morgan Asset Management.At this point, he said, the price-to-earningspremium for growth stocks is greater thanit has been 94 percent of the time over thelast 25 years.

“This should give investors pause,” hesaid, though it’s possible that this extremelevel of pricing will persist.

Mr. Rekenthaler expects that valuestocks will again outperform growth stockseventually. “If I had to bet, I’d bet on valuestocks for the next 10 years,” he said. But, hesaid, because there’s no guarantee that he isright, investing in value stocks requiresconsiderable patience.

In the Stock Market, Value Again Lags GrowthRelatively cheap sharesstill offer opportunitiesfor the patient investor.

By NORM ALSTER

VICTOR J. BLUE/BLOOMBERG

First Hawaiian Bank is one ofthe companies held by theHotchkis and Wiley Small CapDiversified Value fund.

Which sector should youchoose? There’s promiseand risk in both.

To learn more about the Virtus Zevenbergen Innovative Growth Stock Fund, please contact us at 800-243-4361 or visit Virtus.com.

This reprint must be accompanied by a current fact sheet for the Virtus Zevenbergen Innovative Stock Growth Fund. Performance data quoted represents past results. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, so your shares, when redeemed, may be worth more or less than their original cost. Zevenbergen’s industry trends and observations are the result of research conducted by the portfolio management/ research team. These observations reflect their industry expertise and have been prepared using sources of information generally believed to be reliable; however, their accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice. Investing involves risk, including loss of your investment. Applicable sales charges, if included, would reduce performance shown. Please carefully consider a fund's investment objectives, risks, charges, and expenses before investing. For this and other information about any Virtus Mutual Fund, contact your financial representative, call 1-800-243-4361, or visit virtus.com for a prospectus or summary prospectus. Read it carefully before investing. Virtus mutual funds are distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc. 6990 05-19