Change is good. But seeing "positive dynamic change" in companies is even better. That's the stock-picking motto of Alger Focus Equity (ALAFX), a 2025 IBD Best Mutual Funds award winner.
Being on the right side of the innovative changes remaking the economy is the formula for success for this top-performing mutual fund.
"Oftentimes, when there's change, the market doesn't realize what the opportunity is in that change," said Alger Focus Equity co-manager Ankur Crawford. "Our mandate is to find that change where we can have a differentiated viewpoint relative to the market over not just a quarter or a year, but over a long arc of time."
The strategy has delivered plump market-beating returns to investors over all time periods.
One Of The Best Mutual Funds Outperforms
Top-performing $1.9 billion Alger Focus Equity has topped its fund peers in the past one, three-, five- and 10-year periods. In 2024, the fund's 51.77% total return bested 99% of its peers, according to fund tracker Morningstar Direct.
And this top mutual fund's 15.1% average annual return over the past 10 years topped 92% of funds in the large-growth category. A $100,000 investment in Alger Focus Equity 10 years ago would be worth over $408,000 today.
IBD caught up with co-managers Crawford and Patrick Kelly to learn more about their investment philosophy.
IBD: What traits do you look for in a growth stock?
Ankur Crawford: We look for two pillars of growth. One is high unit volume growth, a typical growth company that has high top-line (sales) growth and is a market disrupter. These are companies that dominate their market and are typically taking market share.
IBD: What's the second pillar?
Crawford: The other is what we call positive lifecycle change, which represents companies that have gone through their growth cycle and grown into their markets and are now facing a question mark on how they should grow from here. They either have a new product, new management team that reinvigorates the business model, or they start to drive growth in ways that pivot the business model a little bit.
IBD: The fund only holds up to 50 stocks. Why?
Patrick Kelly: What we're looking for are the best 45 to 50 names to put into the portfolio.
Best Mutual Funds Look For Big Themes
IBD: What are the big secular investment themes you're buying into?
Kelly: From a high level, we continue to believe that we're in the midst of one of the most innovative times in history. The pace of innovation continues to accelerate. This was occurring before the recent inflection in artificial intelligence. And now generative AI (which creates new content based on patterns learned from existing content) is a massive accelerant to the pace of innovation. We believe all this innovation will continue to create winners and losers across sectors over the next five to 10 years.
IBD: What themes are driving change?
Kelly: You have the continued trends of the internet, with mobile internet, e-commerce, social commerce and digital advertising, which continue to drive a significant amount of change. You have cloud computing, digital transformation and automation. And then you have artificial intelligence, which we think will be one of the most transformative technological advances in history.
IBD: The AI theme extends far and wide, doesn't it?
Kelly: There's a number of subthemes under AI, such as all the computing (power) that AI requires, and all the power and infrastructure and data center spend that it requires. AI is also helping to accelerate some of these other major themes, such as cloud computing and digital transformation. And, you know, companies want to digitize their business and then apply AI to it to more effectively and efficiently run their business.
Is AI A Bubble?
IBD: Are there AI parallels to the 2000 tech bubble?
Crawford: We think this is very different. Not that we can't eventually enter a bubble, but that comes at valuation ranges that are going to be significantly different (and much higher) than they are today.
IBD: What's different this time?
Crawford: What happened in 2000, there was the dream of the internet. And everyone pulled forward all of the expectations of what the internet could do. However, if you remember the internet in 2000, despite building in the high valuations, was barely usable. There was no mobile internet. Do you remember downloading or streaming anything on the internet back in 2000? It was like the most painful process ever. The underlying technology and networks were not mature enough to actually support the trajectory of the growth that had been baked in into these stocks.
There were innovations that got layered on top over the next two decades, like streaming, e-commerce and mobility apps. And when the network got strong enough, cloud computing came along, and that enabled a whole different kind of innovation cycle.
IBD: How is AI different?
Crawford: Pat and I have been talking about AI for seven or eight years. We've seen this coming. But why didn't it come sooner? Because we were computing constrained, and it didn't make sense to actually have AI come to market, because it was really expensive to bring these innovations to market.
What's New With Technology?
IBD: What changed things?
Crawford: Nvidia democratized computing. They made the compute layer so accessible and capable that it's spurring this innovation. The main bottleneck for AI has really been (lack of) computing (power). And that bottleneck is being solved. So, all the innovation that comes behind it will be quicker to come than it has historically. And if you look at valuations, they don't seem egregious to us. Nvidia today probably trades at like a 20 (price-earnings) multiple on the Street numbers. So, the valuations aren't sky high. There are some exceptions, but we don't think this is akin to a bubble. The valuations have to be in a different stratosphere if we want to call it a bubble.
IBD: What AI plays do you like?
Kelly: One position would be AppLovin. We initiated a position in early 2024 recognizing that the company was undergoing significant change, innovating at a rapid pace, and would be a significant beneficiary of one of the biggest growth areas: AI.
IBD: How is AppLovin using AI to boost sales?
Kelly: AppLovin operates a platform that helps mobile games monetize users through ads. They've made significant advancements in AI to deliver much better ad targeting, which is leading to significant revenue growth and enhancing their competitive position. They're now leveraging their data and their AI to introduce e-commerce ads. We think this will be a big driver to their revenue and profits over the next several years. They're also leveraging AI to more efficiently run their business.
Going Beyond Tech By Best Mutual Funds
IBD: What other stocks do you like?
Kelly: Talen Energy is an example of a big life-cycle-change type story. Change at these life-cycle-change companies can come about through a new product introduction, new management or acquisition that change the dynamic of a company. Ideally, we're typically looking for earnings acceleration coupled with multiple expansion created by the change. And Talen is an excellent example of that.
IBD: What's the bullish thesis on Talen Energy?
Kelly: They're one of four publicly traded independent power producers, or IPPs. They operate the Susquehanna nuclear plant in Pennsylvania and a fleet of 11 natural gas and coal plants, primarily in the mid-Atlantic market.
IBD: Is this a play on rising demand for power in the digital age?
Kelly: U.S. electricity demand was essentially flat for the past 20 years. We're now seeing strong demand and growth in the power market driven by (trends, such as) electrification, reshoring and AI, which is emerging as a significant secular driver of power demand. This increased demand for power is leading to higher pricing for Talen.
There's also significant demand from hyperscalers (companies that provide cloud computing and data management services) for their power assets at prices that are well above the current wholesale power prices. So, they're signing deals with these hyperscalers, and these contracts go out 10 or 20 years. That provides significant visibility to the companies, versus just being reliant on the spot price for power. As a result, this is leading to a rapid increase in earnings and free cash flow, and that's coupled with multiple expansions due to the improving visibility.
Best Mutual Funds Look For Growth
IBD: Utilities as growth stocks: Who would have foreseen that?
Kelly: I've been a portfolio manager for the past 20 years, and I don't think we've ever invested in a utility-type name until recently. But that's what's made our investment philosophy of investing in change ideally suited for this environment.
IBD: What's an example?
Crawford: Vertiv Holdings. It's the only publicly traded pure-play power and thermal management supplier for data centers. Servers in data centers get hot and Vertiv's cooling systems and products cool the data centers. What's interesting is that Vertiv is in the bucket of positive lifecycle change.
IBD: In what way?
Crawford: It was basically a mid-single-digit grower that really was at the whim of the overall data center market, which was under pressure over the last five years before AI.
But now, as power management and thermal management becomes more and more difficult, Vertiv has a natural advantage in the market with its liquid cooling (solution). As higher-performance chips are rolled out, they will necessitate more of this liquid cooling in data centers, which is going to drive earnings growth well in excess of the revenue growth. Their margins are seen expanding from around 19% or 20% to their long-term target of 25%, which will (boost) earnings.
We really love ideas like this, where the company is in control of their own fate in a market that is expanding for them, and they have operating profit growth.
Seeking Opportunities Overseas
IBD: Any non-AI picks?
Crawford: A name that is new to the portfolio is Sea Ltd., a Southeast Asian consumer internet company that basically has three verticals, e-commerce, financial services and video gaming. It was initially known for its video games. But that is not really what we own it for. We own it for the e-commerce and financial services part of the business.
Today, they have about a 40% share of the e-commerce business in their largest markets, like Indonesia. They also have an interesting flywheel in that they've really invested in logistics. About 50% of their volume runs through their own logistics, which gives them a structural advantage relative to the rest of the players in the market, which is allowing them to grow from 40% share to something higher than that.
IBD: So, Sea Ltd. is a market-share-gainer play?
Crawford: We think they gain share in the market at a rate of 1% to 2% every year. The e-commerce story in Southeast Asia is more nascent. And they're the 800-pound gorilla in the market. The financial services aspect of Sea Ltd. is also very interesting because the population in Southeast Asia is underbanked and underserved from a financial services aspect. So, they're basically pulling customers onto their platform using their financial services. There's really interesting growth potential here. We also like the fact that it's not related to any of the tariff noise that's occurring here in the U.S. It's basically a high unit volume growth company in a market that's burgeoning.
Are Tariffs A Risk For Best Mutual Funds?
IBD: Do you see tariff uncertainty in the U.S. as a big risk?
Crawford: The awareness of tariffs in the market right now is high. The market has exhibited a lot of volatility. And, depending on how these tariffs are implemented, it will impact a lot of things. Does it have great risk for the market? Does it throw us into a significant recession? I think that the administration doesn't want to throw us into a recession, and so I don't feel like it's a great risk anymore, in part, because now it's top of mind for the market. But we're not out of the woods yet. Every day we get closer to, hopefully, some clarity, so (the market) and CEOs can start moving on. So, the administration kind of needs to hurry up and get on with it so that companies can start to implement what they need to do for their growth plans.
IBD: Can uncertainty equal opportunity?
Kelly: Some of these stocks that we've mentioned have had significant sell-offs over the past couple of months that we've been able to take advantage of. So, the near-term uncertainty can create opportunities to buy high-quality companies at lower prices.
IBD: What's your take on the Magnificent Seven stocks?
Crawford: The performance of the Magnificent Seven over the last year has been pretty bifurcated. Things are changing so fast that even the competitive positioning of each of these seven stocks is changing pretty fast.
IBD: Which are your favorites?
Crawford: There are some, like Meta, Amazon.com, and Nvidia, which we're still believers in. Nvidia is leading this charge forward in AI. And those are some of our larger positions. Microsoft is in there as well.
