Jake Moeller, Lipper head of Research for the UK & Ireland, has reviewed highlights of a meeting with Damon Ficklin, portfolio manager of the Polen Capital Focus US Growth Fund.
His findings are published below:
US-based Polen Capital may not be a fund house on the tip of European investors’ tongue, but it is one of a number of boutique American firms that are attempting to diversify business by making a push into the European market via the Ucits brand. Polen Capital is, however, no American upstart, having been in business since 1979 and managing nearly $6bn in total assets under management. The firm is largely dependent on the single strategy that underpins Polen Capital Focus US Growth Fund but, crucially here, its client base is extremely well diversified, consisting of a number of large- and medium-sized institutions, municipal bodies, and private clients.
Investors with a strong appetite for conviction investing will find this fund particularly piquant. In its original US version it is a concentrated 20-stock portfolio. In its new Ucits form it may hold a handful of extra stocks to ensure it complies with the “5/10/40” rule. But it still contains a comparatively high level of active share within its peer group (currently 89% against the S&P 500).
Polen Capital Focus US Growth Fund can be broadly characterized as a large-cap growth fund, but it contains several interesting nuances in its process that give it a slightly more defensive bias than expected from a typical growth manager. It has a remarkably low portfolio turnover and maintains an average holding period of five years. Indeed, Ficklin points out that in the entire 26-year history of the fund, it has only invested in a little more than 100 shares. “Investing in businesses, not shares,” says Ficklin, “is a fundamental tenet in our philosophy.”
Table 1. % Growth of Polen Capital Focus U.S. Growth Fund within Lipper Equity US quartiles (Ucits vehicle from inception, 8/3/13 to 30/6/15 in local currency)
Source: Lipper for Investment Management. Past performance does not guarantee future performance.
The portfolio aims to generate its alpha predominantly through the compound earnings growth of the companies in which it invests. Historically, the strategy has returned 14.5% per annum since its inception, with approximately 12%-13% of this coming from EPS growth, 1% from dividend yield, and the remainder from multiple expansion. Thus, analysis of free cash flow, EPS and revenue growth, and ROE constitute the major focal points in this process.
Decision rules are ostensibly simple—a sustained 20% or better ROE, for example, has to be combined with better than average growth and a strong balance sheet before a stock is considered for the portfolio. Interestingly, although the Polen team members keep a close eye on valuation metrics, they are not overly concerned with buying shares at a substantial discount to market.
“We are not seeking to pay $0.50 for a dollar,” states Ficklin. “Rather, we are happy to pay $1.00 or even $1.10 for a dollar if we are satisfied our growth criteria are met.”
It is an emphasis on “quality” growth and the “margin of safety” offered via a superior business model that gives the fund its unexpected defensive bias. Perhaps, too, the clear admiration Ficklin has for well-known value investors Warren Buffet and Ben Graham has some influence.
Table 2. Share price history of Facebook Inc
Source: Thomson Reuters Eikon
The fund’s long-term holding periods do not preclude businesses with a shorter life cycle being considered. The fund has owned Google since 2008, and the challenge of investing in Facebook was overcome by waiting until after the IPO had settled and for a bespoke evaluation of a new business model.
“Tech companies can cause us problems, since ‘quality’ evolves in a much faster time frame,” states Ficklin.
“We watched Facebook for 18 months and bought when we were convinced advertisers wouldn’t destroy the user experience and that it was obtaining a good ROI.”
Revealing their value tendencies, Ficklin and co-portfolio manager, Dan Davidowitz sold Facebook when it got to about 60x earnings after only a year–a considerable holding-period aberration in the history of the fund.
Table 3. Quarterly rolling 7 Year annualized gross excess returns of historical Polen Capital Focus U.S. Growth Fund strategy (GIPs compliant)
Source: Polen Capital
Polen Capital Focus US Growth Fund makes an interesting proposition. It is certainly a legitimate growth fund and would satisfy style purists from that perspective. However, with an emphasis on quality businesses and its long-term holding periods, it will generally underperform in momentum markets, particularly when a rally is sustained by low-quality growth. Similarly, it has proved more resilient in corrections, performing well during the global financial crisis and more recently on the back of recent “taper tantrum” volatility.
Table 4. Ten year risk/ return chart of historical Polen Capital Focus U.S. Growth Fund strategy (GIPs compliant)
Source: Lipper for Investment Management. Composite data: Spring Capital.
The long term performance of this strategy is robust and the shorter term performance of the Ucits vehicle (See Table 1) has climbed into the second quartile. Looking at the risk/return chart (Table 4), the strategy sits in the ideal “northwest” quadrant and has never returned a negative period in seven years of rolling returns (see Table 3). Furthermore, Ficklin believes that with the end of QE and the current “rich” levels of valuations in the US, the fund’s process will have it well placed in what he sees as an imminent testing environment for other US fund managers.