Brad Neuman

Brad Neuman has spent 25 years as an investor, analyst, and strategist. He started as a sell-side publishing analyst covering homebuilding, housing products, and wireless telecom, worked for chief investment strategists at large sell-side banks, then spent a decade at a couple of hedge funds managing money before joining Alger over 10 years ago. At Alger, he's the Director of Market Strategy, publishing their thought leadership, and portfolio manager on their recently launched Russell Innovation ETF. Three young kids keep him busy outside of work, along with tennis (he coaches his kids and follows them to tournaments) and anything on the water.

On this episode of Behind the Ticker, Brad Neuman joins Brad Roth for the first-ever two-Brads episode to discuss INVN, the Alger Russell 1000 Innovative Companies ETF. It's a product that tries to capture innovation not through the usual suspects but through what Neuman calls "HIP stocks": Highly Innovative but Prudently Priced.

60 Years of "Positive Dynamic Change"

Alger was founded in 1964 by Fred Alger and manages about $25 billion across institutions (endowments, pension funds) and retail distribution through financial advisors. The firm's investment philosophy, called "positive dynamic change," has been in place since the beginning. The idea: where there's change, there's opportunity. Change creates dispersion of potential returns, and if you apply skill to those areas of high dispersion, you can outperform. Two types of change matter: high unit growth (traditional growth companies gaining market share rapidly) and positive life cycle change (companies going through inflection points from product introductions, M&A, or regulation).

Most of Alger's strategies use bottom-up fundamental research with a team of industry-expert analysts doing proprietary field work: talking to customers, suppliers, and competitors. "I wish there was a simple formula," Neuman said. "But if it was, then it could be duplicated." The innovation ETF is their first systematic, top-down approach, and it uses a quantitative screening mechanism rather than the traditional bottom-up process.

How INVN Identifies Innovation

The methodology is built in partnership with Russell. Start with the Russell 1000. Eliminate the bottom one-third of companies by free cash flow margin. This filters out pre-revenue biotech and companies spending heavily on R&D without commercial success. From the remaining top two-thirds, rank every company by research and development spending relative to enterprise value (market cap plus debt plus minority interest and preferred stock, less cash). Take the top 50 companies. Equal weight them. Reconstitute quarterly.

Neuman explained why R&D relative to enterprise value matters: academic research shows that companies with strong R&D spending go on to have strong sales and earnings growth. But the key is the "relative to market value" part. Apple may be innovative, but everyone knows they're releasing a new iPhone every September. That innovation is priced in. INVN is looking for companies where the market is undervaluing the R&D investment. That's why Apple isn't in the portfolio: the innovation is visible and reflected in the price. The free cash flow filter ensures you're only buying companies that have already proven commercial viability.

Not Your Typical Innovation Fund

The result is a portfolio that looks nothing like the Nasdaq 100 or Russell 1000 Growth. As of the launch date, the price-to-free-cash-flow multiple was 12x, roughly half that of the Russell 1000 and far less than half of the Russell 1000 Growth. The portfolio has significant mid-cap exposure and very little overlap with the mega-cap tech concentration that dominates most growth indices. This solves two problems investors have with passive products: over-concentration in large-cap tech and elevated valuations.

Neuman positions INVN as a potential replacement for either passive core strategies or active large-cap allocations. "This is probably the first time that investors can invest directly in innovation," he said. Before INVN, investing in innovation meant either buying thematic funds with narrow sector bets or buying broad growth funds where innovation was one of many factors. Russell wrote a white paper on the concept, available on their website, for advisors who want to dig deeper into the methodology and the academic research behind the R&D-to-enterprise-value factor.

Key Takeaways

• INVN holds the top 50 Russell 1000 companies ranked by R&D spending relative to enterprise value, after filtering out the bottom third by free cash flow margin. Equal weighted, reconstituted quarterly.
• The portfolio's price-to-free-cash-flow was 12x at launch, roughly half the Russell 1000 and a fraction of the Russell 1000 Growth.
• Apple is NOT in the portfolio because its innovation is already priced in. The fund targets companies where R&D investment is underappreciated by the market.
• Alger has been investing in growth and innovation for over 60 years, managing $25 billion. Their philosophy of "positive dynamic change" has been consistent since 1964.
• Russell built and maintains the index. Alger developed the methodology. This is their first systematic top-down product alongside decades of bottom-up fundamental research.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.