Q&A: Amy Zhang on high-conviction investing and small cap equities

As the first Chinese female member of the Alger Partners Plan., Amy Zhang is known for her distinctive approach to investing. Unlike most peer investors in the field, Zhang describes herself as a “stock picker” whose goal is to build high-conviction and benchmark agnostic portfolios of what she believes are exceptional small companies that have the potential to become successful larger companies. Zhang’s unique strategy is highly rewarding. During her time at Alger, the Small Cap Focus Fund grew from less than $15 million to over $3.5 billion and has established a strong track record and significantly outperformed the stock market indices.

Zhang will join the finance and business panel at SupChina’s third annual Women’s Conference, which will take place on Monday, May 20, at the Harmonie Club of New York. Prior to the event, she spoke with us about Alger, her investment experience, and how to manage small cap strategies.

SupChina: Congratulations on your recent promotion! It’s a truly impressive accomplishment for you to be the first China female partner in your firm. We know that you are one of the best small cap managers in the industry. How did you manage to achieve that?

Zhang: I’ve been managing high conviction small cap focused strategy for over 16 years, including 12 plus years at a prior firm and 4 plus years at Alger. For me, it’s all about building strong selections that can lead to good long-term performance. And also this is a high-growth, but also high-quality process in the sense that I pay a lot of attention to downside of protection that has served me well and to deliver attractive returns.

SupChina: You have a strong track record and takes a unique approach to selecting stocks. Can you describe what it is and what kind of companies does the fund usually invest in?

Zhang: We have a unique strategy and we invest differently from our peers in the small cap space. First and foremost, at the core of what we do is identifying exceptional small companies that have the potential to become successful larger companies. So rather than selecting candidates by market cap, we focus on revenues. At the initial point of investing, generally we look for companies with annual operating revenue of less than $500 million. Our sweet spot is probably $100 million to $200 million because we look for companies to double revenue in three to five years. Second, we are benchmark agnostic. By that, I mean that I don’t manage the portfolio by overweighting or underweighting the benchmark. It’s all about fundamental, bottom up stock selection. Our active share is over 90. That’s why our portfolio is an excellent portfolio diversifier for our clients, and an alpha generator. In addition to that, I run a focused strategy, which has less than 50 stocks. I believe in high conviction and I think by having less stocks, we can pay acute attention to the stocks we have and not be distracted. Also, we really have a long-term investment horizon which is three to five years and beyond. That’s because investing in small companies really requires patience.

SupChina: What makes you most proud of Alger and its culture?

Zhang: Alger is a great firm. It’s a pioneer of growth-style investment management with over 50 years of history. The culture here is very performance-driven and very research extensive. We hold each other to high standards. And personally for me, as a woman, it’s important to be in a firm that is friendly to female employees.

SupChina: Are there any companies or sectors you are particularly interested in?

Zhang: We believe that innovative companies can drive long-term performance because they have the ability to transcend economic cycles and outgrow economy through different means. Because of this overall approach, we typically end up more in technology and healthcare sectors.

SupChina: Can you share with our readers some companies held by your fund that you are particularly excited about?

Zhang: One of the examples is Abiomed (ABMD), which is a medical device company specialized in temporary ventricular support products called Impella. Sometimes heart failure patients can be too old or too sick to be operated on. In those cases, Abiomed’s Impella heart pumps, which are the world’s smallest, can assist the pumping of a heart during high-risk cardiac surgeries. Such devices can not only save lives, but also reduces costs at hospitals. What attracted us to Abiomed is that it owns cutting-edge technology and it’s way ahead of any potential competition in the field. They spent over 500 million in research over the last 20 years. And the company’s CEO Michael Minogue really has a very disciplined execution approach.

SupChina: What are some hard lessons you learned as an investor?

Zhang: It’s vital to be rational, humble, and be determined. I often ask myself what could have gone wrong and what I could have done better. Patience is important too, especially in the small cap area.

SupChina: You originally came from Shanghai. How do you incorporate your Chinese background in your investment decisions.  How does China and your understanding of China contribute to your investment success?

Zhang: I grew up in an intellectual family where my mother and grandmother are both very strong career women. So I was taught at early age that women can achieve anything. When I was young, I played the piano for over 10 years and I feel that experience really taught me to be disciplined and have strong work ethic. Practice can be frustrating for me at times but I learned from it that the efforts you put into something usually lead to direct results. The more I practiced, the better I was at playing it. That translated to my professional life.

The Chinese saying 无为而无所不为 also has a big impact on me. In English, it can be roughly translated to “motion doesn’t equate progress.” This thinking speaks to me a lot as an long-term investor.

SupChina: As a mother, what’s your secret of pursuing professional success while raising your child? How do you achieve a healthy work-life balance?

Zhang: My son is used to me being a working mother. He appreciates my work ethic. Being a working mother also means I have less personal time. But I’m proud to say that I never missed a parent-teacher conference. When I’m traveling, I talk to him every day. When I’m not traveling, I spend more time with my son. I check his homework and put him to sleep. We are very close and I feel good about that.

SupChina: It’s widely acknowledged that the investment world is largely male-dominated. There are few women in senior positions in prestigious firms. As a woman, what obstacles did you run into in your career? What helped you overcome them? Regarding gender equality, what are some changes you’d like to see in the industry?

Zhang: Here at Alger, we have a culture of meritocracy and we have more female portfolio managers and research analysts, compared to the industry average, which is great. I believe that in order to be taken seriously as a woman, I need to put in the extra hard work. In the meantime, I am grateful in a sense that our industry is primarily about performance. If one can demonstrate strong performance, they will be respected regardless of gender.