Fishing high-quality businesses featuring a sustainable competitive advantage in the global stocked pond, that is part of Julian Pick and Jeff Mueller’s daily responsibilities as co-portfolio managers of the Polen Global Growth strategy at US boutique Polen Capital Management.
The fund, available in a Ucits format, is one of the four strategies run by the Florida-based manager, that include three large company growth funds and one small company growth strategy focusing on US stocks.
Polen Capital, established in 1979, is owned at 60% by employees, 20% by Polen family trust, 20% by London-headquartered investment and business development platform iMSquare with which a partnership was tied to enlarge the investor base of Polen Capital Management in Europe.
The firm tallies over $16bn (€13.6bn) in assets under management. Of that, the Global Growth strategy, launched at the start of 2015, represents $51.3m (€43.68m) – 2% of which are managed in the Ucits version.
Speaking to InvestmentEurope, co-portfolio manager Pick says that the pair does not try to be involved with other asset classes and that the Global Growth strategy’s philosophy is to invest in an unconstrained way in very high-quality businesses with a concentrated approach and a margin of safety. He argues that holding a concentrated portfolio is a way to reduce risk.
“Our flagship Focus Growth strategy has generated over 14% annualised gross returns (c.13.5% net returns) since its inception almost thirty years ago while reducing risk by strictly adhering to a philosophy and process that has remained unchanged. That same process underpins Global Growth. Our overarching goal is a concentrated portfolio of roughly 30 competitively advantaged, high-quality businesses that in aggregate, can compound their earnings per share at a roughly mid teens rate or higher,” explains Mueller, co-portfolio manager.
“Our belief is that if we buy those stocks at a fair price, that over the long term, the stock price would follow the earnings growth of the companies. We have guardrails that we use as screens, leading us to select companies with strong balance sheets and high returns on capital, which are two main features of a high-quality business to us. Most of our companies have high levels of free cashflow, returns on equity of 20% or greater, stable to improving margins and real organic revenue growth,” he develops.
The investable universe of the Global Growth strategy is comprised of about 100 to 150 companies of which the pair picks the 25 to 35 best ones in its view. Companies are investigated one or two years before any purchase. Mueller underlines that the duo always thinks the future of a company five to ten years out before investing and does not play macro calls.
“Our guardrails have prevented us from investing in certain sectors like material, utilities, telecoms, energy. Energy companies are held hostage by the commodities that underpin their demand. We have also not historically invested in banks,” he tells InvestmentEurope.
Factors that could influence a sell decision of the pair include a threat to competitive advantage, the deterioration of a company’s fundamentals and/or outlook, the reduction in the probability of earning an appropriate return over the five coming years and also the identification of a more attractive sustainable growth investment opportunity.
As of 31 August 2017, the Ucits fund’s exposure to information technology stocks was 48.35% with US tech giant Alphabet as lead position (6.39%).
“In today’s world, either you are a tech company, your company is embracing technology or is about to get disrupted by technology. As disruption and technology use are on the rise, it seems a valuable reason to hold a concentrated portfolio. Many of our non-technology investments are quite good at investing in technology and making it a competitive advantage like Starbucks and Adidas,” assesses Pick.
He adds that of the 27 current companies held in the Ucits fund, the pair has been holding 21 of them since inception in 2015.
“Our turnover is less than 10% annualised. We consider that the competitive advantages of these 21 companies we’ve held since the beginning remains equal or has even strengthened in certain cases,” Pick pinpoints.
Discussing stock valuations, Mueller suggests that they remain high in certain pockets of the market and that some of the fund’s US technology holdings such as Alphabet are now trading inexpensively relative to their growth and their quality while some of our European tech holdings reporting double-digit earnings are being traded at elevated valuations.
“Alphabet is one of the most competitively advantaged companies in the world today. The firm remains on the right side of two secular trends. One is Internet proliferation. Only around 40% of the world is having access to Internet currently. Companies like Facebook and Alphabet will be direct beneficiaries of the Internet’s extension in areas where it is not yet accessible. The second trend deals with smartphones. They are very under monetised compared to PCs. The hiring of a new chief financial officer has brought capital allocation discipline and transparency, which is positive for shareholders.
“Lastly, a number of assets should continue to be profitable. An example is YouTube, which is estimated to generate €10bn in revenue annually. We appreciate the long-term view of Alphabet’s management. When YouTube was purchased by Alphabet, critics raised concerns about poor capital allocation made by Alphabet through the acquisition. However, the management team had seized the potential of YouTube and guessed that people would eventually consume media in new ways. What was considered a bad acquisition turned out to be a very strong one. It is a similar story with Android,” highlights Mueller.
Among other tech holdings in the Polen Capital Global Growth fund, Chinese internet services provider Tencent Holdings as well as US giants Facebook and Apple can be found.
“There is a strong argument that Apple has created more profits in its lifetime than any company in US history,” says Pick.
“Automatedly, Apple finds itself in a two-year product cycle. Short-term investors tend to overreact to the product but we look at the rise of technology adoption and at the importance of Apple’s devices in one’s life. Perhaps the iPhone is the most sold consumer good around the world. It is remarkable to see that in certain countries, despite having a low income, some individuals still own a smartphone, most likely an iPhone.
“Lastly, we do not expect Apple to have the growth it had in the past but it seems very likely to us that the company can sustain mid-range-single digit earnings for several years, with pricing power, a strong competitive edge in the premium in the market and customers replacing items every two to three years,” the co-manager of the Polen Capital Global Growth fund concludes.