Alger’s long-running growth strategies have outperformed the market over the past two decades, driven largely by gains in technology stocks. That history helps explain why the asset manager continues to lean into artificial intelligence, even as AI-driven equities have stumbled and questions grow about whether the current pace of spending can be sustained.
Despite recent volatility, portfolio manager Patrick Kelly remains confident in growing AI demand and in the infrastructure buildout to keep it running over the next decade.
“AI will be ingrained into virtually every aspect of our lives, and the demand for compute seems almost limitless,” he said, adding that agentic or multimodal AI will generate more demand and be more energy intensive.
Because companies not using AI are already starting to fall behind, the value proposition for AI is rising alongside increased usage. “We are barely in the first innings.”
But not every company will benefit equally. “We don’t think everyone’s going to be a winner, there will be winners and losers across sectors and industries.”
“We want to be positioned in the companies that we believe are innovating and benefiting from these secular trends and avoiding those that are being disrupted. We also recognize the importance of being mentally flexible in the market given the mind-blowing pace of innovation and disruption,” he said.
Alger’s thesis has led the firm to acquire large positions in several of the Mag 7 stocks, including Nvidia, Microsoft, and Apple. The firm’s two biggest funds have an average weighting of around 50 percent information technology stocks, with the remainder split across areas like financials, utilities, healthcare, and communication services.
Kelly outlined potential risks to the AI compute thesis that underlies his portfolio strategy: that AI advancement loses pace, that the funding environment slows, or that companies fail to see returns on capex and pull back on spending. He has yet to see evidence that those risks will materialize.
Jeff Levi, principal at Casey Quirk, said that in the current environment active managers need to take active risk and make active bets. “Active investors want to see managers who make intentional bets, the question is do they make bets in the right way and that are directionally in line with where markets go, or do they mistime bets or make bets that don’t pan out.”
Those that succeed will see significant growth, added Levi.
To date Kelly and Alger have largely succeeded. Kelly’s Capital Appreciation Strategy has ranked in the first percentile of the eVestment US Large Cap Growth Equity rankings since he took over as portfolio manager in 2004.
Sticking to the Plan
But the firm hasn’t always delivered consistent outperformance.
“The years of 2021 and ‘22 were some of my toughest years as a PM,” he said. “But when you go through tough periods it is about how you emerge. Bouncing back with a strong performance is testament to sticking to the philosophy and the process.”
Part of this meant moving into more defensive sectors.
“We rotated into some more cyclical beneficiaries like some healthcare related names, but rates were rising and the stocks emerging from Covid-19 were outperforming,” he said. “In downturns there are always stocks that you can rotate into that offer more stability or are benefiting from big secular trends that you think can do well, independent of the economy.”
If a trend were to come along that derailed AI and tech, Kelly said the firm would be able to quickly reduce exposure and increase its position in areas like healthcare or industrials. He stressed the importance of identifying change before it is recognized by the market, even if it leads to mistakes.
“Hopefully over time you are getting a lot more right than you are getting wrong. It is all about minimizing the damage.”
