Polen's patient play goes global
The Polen Capital duo is taking the firm’s concentrated growth discipline and applying it beyond the US to find the highest-quality companies in the world.
05 December 2019
The FPA Crescent manager reasoned that value investing was more a way of life for its proponents than an approach that could be dipped in and out of.
Given how tough it’s been for value managers in the post-crisis era, perhaps this genetic determinism is the only reason there are any of them left. But where value investors are born with their faith, growth managers seem to arrive at their chosen philosophy by more circuitous routes.
Take Damon Ficklin (pictured, left) and Jeff Mueller (pictured, right) for example, the duo behind the Polen Global Growth fund. Today, they are avowed apostles of the school of growth, but both were educated at colleges famous for very different approaches.
For Ficklin it was the University of Chicago Booth School of Business, so often synonymous with the work of Eugene Fama, Kenneth French and the efficient market theory. In Mueller’s case, it was Columbia University and its Benjamin Graham-focused value investing program.
However, both of them say that, despite what these schools are famous for, their courses offered much more and they were drawn to growth investing, inspired by Warren Buffett and Charlie Munger.
‘I was always a Warren Buffett junkie,’ Ficklin says. ‘Even before school and college, I believed in investing for the long term – owning businesses instead of trading stocks.’
‘My time at the University of Chicago kind of belies my underlying routes. While it is known as the efficient market hypothesis school, they do have Richard Thaler and other teachers, which is more my track and my interest. I always knew what I was looking for, a concentrated, quality growth manager.’
Mueller makes a similar argument.
‘Columbia has been known as a very good school for value investing but they do an excellent job of presenting a wide array of different investment styles. It was around the end of my first year that I started to realize that the best way to compound wealth over time is in high-quality companies that can compound their earnings for many, many years,’ he says, adding that his original inspiration, Graham, has many lessons for growth investors.
‘He gave the world the concept of the margin of safety,’ he says. ‘We utilize that very much and the margin of safety for us is the quality of each business that we are investing in.’
Ficklin adds: ‘In chapter 20 of Ben Graham’s The Intelligent Investor, it talks about applying this margin safety to the growth investing framework. It’s a very small part of the book but it’s there.’
He argues that Buffett was an early exponent of this approach, applying the margin safety framework to higher quality companies, rather than cigar butts, and Polen Capital has followed where he led.
It should be noted that Mueller’s journey to fund management is circuitous for more reasons than his alma mater.
Where Ficklin took the relatively straight-forward path of studying accounting, becoming an analyst and then making the move to fund management, Mueller was serving in Iraq when he decided that a career in investment was for him.
‘I joined the Marine Corps the day after September 11 in 2001 and from there, I ended up going to flight school,’ he explains.
Mueller would go on to fly F/A-18 Hornets for the next 10 years, which included missions in Iraq. It was during this time that he was handed a copy of The Intelligent Investor, which inspired the career he has today.
‘It really struck me in a very big way,’ he says.
One way or another they both found the high-quality, concentrated growth shop they were looking for when they landed at Polen Capital, the Boca Raton, Florida-based boutique.
Ficklin got there first, joining in 2003 and working alongside the firm’s founder David Polen. His discipline of building concentrated, low-turnover portfolios made up of stocks with above average growth, is still practiced by the business today.
While this approach appealed to Ficklin, it also helped that the firm was based in his home state.
‘I wanted to be back and there’s not that many firms that do what I wanted to do in the south east of the country,’ he says.
Mueller, a Texas native, who joined in 2013, was less familiar with the location.
‘I had to look up Boca Raton on Google Maps,’ he laughs.
The company founder David Polen died in 2012, by which time Dan Davidowitz and Ficklin had been named portfolio managers and taken over much of the firm’s investment research. The two of them ran the firm’s flagship Polen Growth fund from then until July this year, when Ficklin stepped off the US-only strategy to focus solely on the Global Growth fund.
The US and global funds share an approach and, with the global fund just over 50% exposed to the US, many of the same holdings.
The global fund typically holds between 25 and 30 stocks, consisting of companies with a minimum market cap of $10 billion, which Ficklin and Mueller deem to meet five key criteria:
Return on equity sustained above 20%
Exceptionally strong balance sheets
Stable or growing profit margins
Abundant levels of free cashflow
Real, organic revenue growth
‘Any of these guardrails are fairly powerful on a standalone basis. However, when they are combined, these five are very potent,’ Mueller says. Ficklin adds that the ultimate aim is to find companies that might have a competitive advantage.
As a result of these criteria and the managers’ fundamental bottom-up analysis, the fund tends to be skewed to technology, consumer discretionary and healthcare companies. Geographically, it is heavily weighted to the US and other developed markets, with the exception of big positions in Chinese giants Tencent and Alibaba.
‘We have a very heavy bias to globally dominant businesses and we simply don’t find a lot of them in emerging markets,’ Ficklin says. ‘The two exceptions are Tencent and Alibaba. To be fair, they are not globally dominant, just very dominant in a very large market.’
It is an approach that has delivered for investors. Over the last three years to the end of September, the fund sits top of the Citywire Global Large-Cap Growth category, ranked first out of 33 funds for total returns. During that time, it has returned a cumulative 58.6% versus the peer group average of 44% and the MSCI All Cap World index’s 34.2%.
These index-beating numbers are in part driven by the fund’s highly concentrated approach, but this has not come at the cost of additional risk. The fund’s maximum drawdown during this time of 11.6% is better than two thirds of the category.
Mueller argues that far from adding risk, the fund’s focus on a few, high-quality stocks makes it a safer bet than its peers.
‘That may seem counterintuitive,’ he says. ‘But we have been a lot less volatile than the market and the peer group, and captured a lot less of the downside as a product of only owning high-quality companies all the time. For example, last year, which was a very tough environment for any manager, when the MSCI ACWI was down about 10%, our global growth strategy was up about 3%.’
The fund aims to hold companies for around five years, meaning turnover in the fund is low at about 20%, with over half of the stocks in the portfolio having been held since inception.
‘We are not trying to create returns through activity, we are not trying to buy low, sell high, identify the theme du jour and outperform over the next 12 months. We are really trying to identify what we think are the best growth companies for the long term, try to pay a fair price and then hold them and let earnings growth drive the outcome,’ Ficklin says.
One of these holdings is Adobe, which they bought in 2016 at just below $88 per share, a figure that has since risen to around $270. It is the fund’s third largest position at 5.72%, according to Morningstar Direct, behind Microsoft (6.97%) and Mastercard (5.92%), a position held in conjunction with the fifth top holding, Visa (5.51%).
Mueller says they were drawn to Adobe after realizing that the emergence of cloud computing would help many businesses by allowing them to grow recurring revenue. He says it is currently benefiting from its dominance in photo and video editing products and the growth of digital media.
‘As companies want to market through websites, Adobe is at the forefront of this,’ he says. ‘More and more enterprises need to create more content and video, and they have to hire more digital media and creative roles and it’s creating outsized growth of more people interested in purchasing Adobe products for video and software editing.
‘It continues to grow revenue in excess of 20%. When we purchased it, operating margins were 22% and they are already up at 40% overtime. It meets all the guardrails, it’s capital light and it’s growing well within an industry that is experiencing tailwinds.’
While additions to the portfolio are not frequent, they do happen, usually replacing a position that is no longer hitting one the managers’ five criteria.
‘The most common reason we sell is because we have a better idea,’ Mueller says.
In August, the pair bought into healthcare company Abbott Laboratories, replacing Swiss inspection and testing company SGS.
The latter was sold because earnings growth was good but not quite up to the managers’ expectations.
The fund is approaching its five-year track record and has so far attracted $95.2 million in assets under management. While a relatively new strategy compared to the firm’s 30-year history running US equities, Ficklin and Mueller believe Polen’s philosophy and success is transferable to the global stage.
‘We are very proud of the track record we have built on the Global Growth fund but we have been executing this discipline for 30 years now,’ Ficklan says. ‘So, from my point of view, having executed it for going on 17 years, I could not be more excited to be focused on the Global Growth strategy and getting to execute this proven investment process without any geographic boundaries, to find the best companies in the world and put them together in a concentrated growth portfolio.’