Polen Global Growth Q1 2022 Portfolio Manager Commentary

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Seeks Growth & Capital Preservation (Performance (%) as of 3-31-2022)

chart: Performance (%) as of 3-31-2022



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Polen Global Growth (Gross)







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The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Periods over one-year are annualized. Please reference the GIPS Report which accompanies this commentary.

The commentary is not intended as a guarantee of profitable outcomes. Any forward-looking statements are based on certain expectations and assumptions that are susceptible to changes in circumstances.

All company-specific information has been sourced company financials as of relevant period discussed.


During the first quarter of 2022, the Polen Global Growth Composite Portfolio (the “Portfolio) was down -13.30% and -13.54%, gross and net of fees, versus a decline of -5.35% for the MSCI ACWI (the “Index”). Since inception, the Portfolio has compounded at an annual rate of 14.54% and 13.62%, gross and net of fees, versus 9.67% for the Index, outperforming the Index by 395 bps, gross of fees. On a cumulative basis since inception, the Portfolio has delivered returns of 167.56% and 152.27%, gross and net of fees, versus 95.34% for the Index.

Several exogenous factors converged in the first quarter of 2022, including persistent inflation, tightening monetary policy by central banks aiming to combat inflation, ongoing supply chain issues, COVID-19-accelerated dynamics, and heightened geopolitical risk with the Russian invasion of Ukraine. Each of these factors has influenced equity values recently. However, when thinking through the direct fundamental impact that we expect each issue to have on our holdings and the aggregate Portfolio, we remain confident in the Portfolio’s ability to continue to deliver mid-teens EPS growth during the coming years.

Addressing Inflation & Interest Rates

Looking at inflation first, we’d note that we believe a quality growth portfolio will prove to be a good way to manage through an inflationary environment, however long that might last. Inflation will likely prove challenging for businesses that are capital and/or resource-intensive or that offer undifferentiated products and services—these types of businesses are often unable to pass on cost pressures through higher pricing. We do not own these types of businesses, though.

We invest in capital-light businesses that are not very resource-intensive and offer differentiated, demanded products and/or differentiated, value-added services.

These businesses tend to regularly raise prices, if not on a like-for- like basis, by continually innovating to add more value and pricing for the value that they are providing. While there is certainly a limit to how much any business can raise its prices without impacting demand, the point is that, broadly speaking, our businesses see less cost pressure and have more pricing power. A reasonable amount of inflation is quite manageable for our holdings.

Of course, with inflation being higher and more persistent than expected, the U.S. Federal Reserve and other monetary authorities are now being forced to act. The Fed increased its benchmark interest rate for the first time since 2018 and has signaled a series of increases throughout the year, most recently indicating that they would have been raising rates even faster if not for caution around the pending impact of the Russian invasion of Ukraine. Considering first the potential direct impact of higher interest rates, we would note that we do not expect a meaningful impact on our holdings or the overall Portfolio. In the aggregate, the Portfolio has a very modest level of debt, with many of our holdings flush with cash and prodigious free cash flow, which provides self-funding. While some of our holdings choose to have some debt in their financial structure, they do not typically rely on the market for financing.

Even if we extend the higher rate scenario further and assume that tighter monetary policy achieves the aim of cooling off demand—or even goes too far and creates a recession—we’d note that is not a major concern for us either. We own secular growth companies that tend to create their own success and grow well through environments, which is a key reason why our portfolios have historically done well through tough environments. Our Portfolio’s earnings usually continue to grow while the broader market’s earnings demonstrate greater economic sensitivity, with large declines during recessions and crises. We do not expect this time to be different from a fundamental perspective.

So, if these issues are not long-term issues for the companies that we own, then why has the Portfolio declined so much this quarter and underperformed the broader market when we typically outperform during challenging markets? We think there are a few pieces to the answer. First, to conclude our comments on interest rates, while we do not expect the direct impact of higher rates to be a meaningful issue for our holdings long-term, rising rates typically lead to lower price-to-earnings (P/E) multiples for equities. Mechanically, higher interest rates present other avenues for investors to earn returns and may represent an opportunity cost for equities. A P/E multiple is essentially the inverse of an earnings yield. The higher the rate one can earn from a bond, for example, the less an investor is willing to pay to earn a similar yield through other securities, so valuations adjust.

In the current environment, the market has quickly incorporated adjusted interest rate expectations into security prices. In addition to the somewhat mechanical aspect of this, there are a few factors that we believe contributed to the greater pressure on growth company valuations recently. One, high-quality growth companies tend to have a longer duration and/or higher earnings expectations in future years. The relatively swift change in interest rate expectations can have a greater impact on the discounted value of future free cash flows for high-growth companies relative to low or no-growth companies. Two, high- quality growth valuations have been gradually creeping higher during the past many years and even more so in 2021. While we have been managing the valuation of the Portfolio, as noted in prior commentaries, valuations did rise a bit in 2021. That has quickly reversed course during the first quarter of 2022 with valuations now back to very reasonable levels.

A third contributing factor to equity valuation declines recently has been that more companies have guided to lower-than- expected growth in 2022. The last two years have been rather abnormal years for many businesses. Some businesses saw a major decline in 2020 and then a major recovery in 2021. Others have seen a meaningful boost throughout the pandemic as the environment changed patterns to their benefit. In many cases, it was harder to determine what the ongoing growth profile of some businesses would be as we returned to a more “normal” environment.

In short, it seems that some companies did get a pull forward during COVID-19—some of which were the same high-growth, higher multiple companies that were leading market valuations higher. So, at the same time, investors are adjusting their expectations for macro factors like inflation and interest rates, they are also trying to divine future growth rates in an environment where that has been more challenging. Any disappointments have been met with punishing stock price adjustments, some justified and some not, in our opinion. While this is not an ideal environment, we’ve taken advantage of several short-term share price declines, initiating a new position in Netflix (NFLX) and adding to our positions in SAP (SAP), Amazon (AMZN), Align Technologies (ALGN), and Adobe (ADBE).

Russia and Ukraine

Finally, the conflict between Russia and Ukraine prompted greater market volatility and a rotation toward industries like oil and gas, which collectively appreciated over 22% during the quarter.1 We typically do not own the types of companies that were favored in this rotation because we usually find that energy businesses cannot meet our criteria to compound underlying earnings per share consistently through cycles. Fundamentally speaking, our Portfolio businesses are not directly impacted by the conflict.

Taking all these factors together, we are reminded of the quote from legendary value investor, Ben Graham, who remarked, “In the short run, the market is a voting machine, and in the long run a weighing machine.” What he meant was that in the short run, markets can be volatile because of very human emotions like greed, fear, and euphoria. In the long run, though, businesses tend to be weighed appropriately. This fundamental belief has underpinned our investment approach for over three decades and will continue for decades.

Despite the combination of each of the factors detailed above, they do not change our view, and we remain confident in our businesses driving mid-teens underlying earnings per share growth over time and through cycles.

Also, it is worth noting that our time-tested approach has delivered a return of 13.86% returns net of fees during the last three years and 15.90% returns net of fees over the last five, inclusive of this past quarter.

Portfolio Performance & Attribution

With respect to individual companies, Aon (AON), Visa (V), and Mastercard (MA) were the top absolute performers during the quarter.

We purchased Aon during the second quarter of 2021 and brought the position to an average weight within the Portfolio during the following quarter. The business has performed well since Aon and Willis Towers Watson mutually agreed to terminate their business combination agreement in the face of litigation with the U.S. Department of Justice. Since that time, we met with CEO Greg Case and CFO Christa Davies to discuss Aon’s competitive advantages and growth drivers more thoroughly. We hold both executives in high regard and believe they are exceptional capital allocators. Eighty percent of Aon’s business is non-discretionary, as insurance and many of the company’s other solutions are necessary costs of their customers simply doing business. Aon plays a significant safety role within the Portfolio, as demonstrated by its performance during the quarter.

We added to both Visa and Mastercard during the final quarters of 2021, based on the belief that both businesses were trading at attractive prices and poised to deliver, double-digit returns over the next three to five years. Cross-border transactions–a highly profitable business segment for both companies–represent roughly 10% of Visa and Mastercard’s volumes and 25% of their gross revenues, so lockdowns have severely impacted this segment due to stifled travel. While it was impossible to know when people would begin traveling again, we accepted this reality with the belief that travel would eventually return. Both companies have commented that as soon as a country or geography reopens, cross-border volumes reignite, amplifying each business’s growth and profitability. We think these near- term headwinds have created an attractive long-term investment opportunity.

In contrast, the three leading absolute detractors during the quarter were ICON (ICON), Align Technology, and Adobe.

In another example of the COVID-19 pull-forward dynamics, the clinical research organization (CRO) market has recently experienced P/E declines across the board as biotech funding has declined from record levels seen in 2020. While funding is down relative to 2020, on a five-year basis, it remains above typical levels— in fact, funding levels are roughly double those seen in 2016. Additionally, although many businesses in the CRO market experienced slower growth because of these reductions, ICON’s business has yet to be impacted. ICON is well-balanced and serves many of the world’s largest pharmaceutical companies as well, having partnerships with 11 of the top 15.

Customers increasingly turn to partners like ICON to aid in the development of increasingly complex and groundbreaking therapies like mRNA (Messenger ribonucleic acid) and gene therapies.

Our research shows the market opportunity is large, and we believe ICON remains competitively advantaged and well- positioned to compound at high rates while continuing to take share from competitors.

We maintain our high conviction in this business, as reflected by its large weight within the Portfolio.

Align Technology and Adobe are prime examples of the COVID-19 air pocket. Both continue to compound capital at high rates and exhibit increasing returns to scale. In the case of Adobe, reported growth appears to have decelerated significantly. However, when accounting for foreign exchange impacts and for their fiscal year 2021 having 53 weeks, the adjusted revenue growth was 17% year over year, which is fully in line with their typical growth rates. The 53rd week of the fiscal year 2021 added $267m to total revenue, creating an eight-percentage point difference in reported and adjusted revenue growth. We applaud management’s recent roll- out of Creative Cloud Express to tap into the non-professional market, as well as increasing price in 2022, which we expect to materialize in the back half of the year.

With respect to Align, share price performance seemed to be related to a deceleration in case shipments, which was mostly due to the Omicron variant and a tough year-over-year comparison to a 37% growth rate. That said, Align’s systems and services segment revenues grew 61% this past quarter on top of 25% growth during the same period in 2021 and half of the scanner sales were to new offices, which has historically been a great leading indicator for increased clear aligner sales. CEO Joe Hogan has been frequently asked whether the deceleration was due to his company pulling forward demand during the pandemic. Each time he has replied that the deceleration was due to the Omicron variant causing practice closures and staff shortages.

We took advantage of these price movements in both Adobe and Align by adding to our positions in both companies during the quarter.

Portfolio Activity

Given price volatility resulting from the exogenous factors previously discussed, we took advantage where we felt it appropriate. We purchased Netflix and sold PayPal (PYPL). We added to our positions in SAP, Amazon, Align Technology, and Adobe. We trimmed our weightings in Microsoft (MSFT) and Accenture (ACN).

We have been following Netflix closely for many years. It is a dominant, globally scaled business enjoying – and in large part driving – the secular shift to streaming content. The two things that previously kept us on the sidelines were negative free cash flow (FCF) and valuation. Both have changed. FCF is now positive, and valuation is now at an attractive level. Streaming entertainment, which is on-demand, personalized, and available on any screen, is now often the preferred choice over linear TV. As such, Netflix, the leader in on-demand streaming, should continue enjoying margin expansion due to economies of scale. With respect to the “streaming wars,” we do believe content spend will be leveraged over time and that the industry will experience consolidation.

After reporting third-quarter 2021 results, we spoke to PayPal’s CFO to discuss the guidance changes, the strategy going forward, and the rumors surrounding the Pinterest deal. It was a constructive conversation that increased our confidence in management’s direction for the business and in its ability to exploit its competitive advantages within the exciting area of digital payments. We increased our position size at the time, bringing it to an average weight. Our confidence in management declined, however, following their fourth-quarter results, which included a change in business strategy, disappointing 2022 guidance, and the removal of significant elements of their long- term guidance provided less than a year earlier and seemingly confirmed throughout 2021. Ultimately, we decided to exit our position completely based on these factors. While we think the backdrop for payments—specifically digital and mobile payments—is attractive and would have expected the tailwinds from COVID-19 to play very much to PayPal’s favor, management has been less successful than we would have expected. In short, we think execution has been poor, and we have lost confidence in management. We believe that our large weights in Visa and MasterCard provide better and more certain long-term investment prospects while taking advantage of the favorable backdrop in payments.

In our opinion, SAP is demonstrating that their cloud transition and RISE with SAP strategy are working. We added to our position upon evidence that CEO Christian Klein’s strategy is bearing fruit, and the stock trading down to an attractive valuation during the quarter. The strategy and sell-off are connected, and we believe it provided an opportunity for long- term shareholders. The company recently reported weak 2022 margin and FCF guidance. This was expected if cloud growth accelerated – which it has. Current cloud backlog has accelerated to a mid-20% growth rate, and the S/4 HANA Cloud Backlog and Cloud Sales have accelerated as well. Cloud, which tends to be a very sticky business with high recurring revenue, is now a >$10bn business and represents roughly 40% of sales.

Our research shows this should only increase over the next five years. If management continues to successfully execute its strategy, the transition should create a mechanical lift to margins and greater levels of FCF. We believe SAP is a durable business led by capable management that is poised to deliver high-quality mid-teens earnings growth over the next five years.

Amazon has done a terrific job managing through the pandemic, in our view. Many companies struggled to pivot their business model during COVID-19, which represented an existential threat. Amazon had the opposite problem – a surge in demand. The company leaned into this by entering an extremely heavy investment cycle, doubling its fulfillment network and headcount over the past two years. To put this into context, Amazon added 273,000 employees in the last half of 2021 on top of over 400,000 employees the prior year. The company has also made significant Capital Expenditures, adding IT infrastructure for AWS and transportation capacity during this period. This all took place in the face of inflation related to wage increases and higher pricing from third-party carriers supporting the company’s fulfillment network. These heavy investments paid off—AWS grew 40% year over year, reached a $71B annual run rate, and total company revenue posted a two-year annual compounded growth rate of 25%. We believe this heavy investment cycle, like Amazon’s previous ones, will continue to support ongoing growth and will further separate Amazon from its competition while also providing the ability to increase margins through economies of scale. With respect to the margins specifically, AWS and Advertising – two fast-growing businesses – continue to contribute greater operating earnings to the overall business. We believe management has done an excellent job managing through this period and that the company is even stronger today than when COVID-19 first began to spread around the world.

Align Technology continues to de-risk as it grows and is exhibiting increasing returns to scale. The business prints over 800,000 unique clear aligners per day, and competitors are realizing how difficult it is to compete with this globally scaled, well-led company that enjoys the leading brand and product in the market. We applaud management’s stewardship of the business thus far and believe there is a very long period of compounding ahead of it. Despite robust fundamentals, the company was swept up in the sell-off that occurred during the quarter, and we took advantage of the favorable valuation by raising it to an average position size within the portfolio.

Adobe experienced a sharp decline in its valuation as well. Adobe has long been one of our largest positions and one of our best performers over the past seven years. We viewed the current share price decline as an opportunity to own more.

Microsoft and Accenture’s businesses are both firing on all cylinders and continue to enjoy an acceleration in their respective fundamentals because of the increase in digitization around the world.

Nearly every company today is searching for ways to become more digital, and both Microsoft and Accenture are positioned to provide many of the solutions these companies seek. This inflection in fundamentals was not lost on the market, and each business’s stock performed exceptionally well in 2021. In fact, they represented two of the three top absolute performers for the Global Growth Portfolio last year. As a result, their respective stocks are currently more fully priced. As such, we lowered Microsoft from our largest position within the Portfolio and Accenture to an average weight. We maintain high conviction in both businesses and plan to own them for many years, but recognize the increase in their prices.


We have managed client assets through a wide variety of circumstances over the years, including during periods of stress and market volatility. We are confident that our time-tested approach of only investing in what we believe are among the best businesses that will compound underlying earnings per share over time and through cycles will continue to drive favorable client returns. While short-term share price movements do not always reflect the fundamentals, given enough time for markets to discern the underlying quality and growth of various businesses, robust fundamentals tend to provide ballast. We are confident that the Portfolio can continue to deliver mid-teens earnings per share growth in the coming years and believe that will ultimately be reflected in share prices.

Thank you for your interest in Polen Capital and the Global Growth Portfolio. Please contact us with any questions.

Damon Ficklin, Head of Team, Portfolio Manager & Analyst

Jeff Mueller, Portfolio Manager & Analyst


1 Source: Bloomberg. From 12-31-2021 to 3-31-2022.

GIPS Report

Polen Capital Management Global Growth Composite—GIPS Composite Report



Composite Assets

Annual Performance Results

3 Year Standard Deviation1

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1A 3 Year Standard Deviation is not available for 2015 and 2016 due to 36 monthly returns are not available. Total assets and UMA assets are supplemental information to the GIPS Composite Report.

N/A – There are five or fewer accounts in the composite the entire year.

While pitch books are updated quarterly to include composite performance through the most recent quarter, we use the GIPS Report that includes annual returns only. To minimize the risk of error we update the GIPS Report annually. This is typically updated by the end of the first quarter.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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