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The investment thesis behind Workday – a holding in the Polen Capital Global Growth Fund

The investment thesis behind Workday – a holding in the Polen Capital Global Growth Fund

In this week’s video insight I joined Damon Ficklin, Head of Team and Portfolio Manager from Polen Capital to shed some insight into the strategy behind the Polen Capital Global Growth Fund. Damon highlights how the Fund invests across the growth spectrum owning companies like Amazon or Workday, higher growth businesses although it is also happy to own companies on the other end of the spectrum like a L’Oreal or an Abbott Laboratories. Damon also shares how the investment thesis behind Workday and why it is currently a holding in the Fund.

Transcript:

David:

Hello, I’m David Buckland and welcome to this week’s video insight. Today, I’m being accompanied by Damon Ficklin, who’s the longest tenured employee at Polen Capital. Polen Capital run a few different strategies, and I just thought we’d kick off today by asking Damon to tell us a bit about the organization, Damon.

Damon:

Yeah absolutely, we’re a global asset manager, we have about 230 employees at Polen Capital today. We’ve been growing nicely over the years and anticipate they will continue to grow at a nice rate.

We have four distinct investment franchises, I’m the head of the large company growth team based at our headquarters in Boca Raton, Florida. We also have a small company growth team based in Boston, investing, employing the same strategy and process to invest in small and mid-cap companies around the globe, an emerging market growth franchise in London and Hong Kong, and then a credit team that’s based just outside of Waltham, Massachusetts.

David:

Thanks very much. And importantly, you guys effectively own and control the business.

Damon:

We do, so employees own 72 per cent of the firm and control 100 per cent of the firm. We have a couple of passive owners, one the Polen family trust, which is David Polen, the founder’s family trust, and then I, a global partner that owns a 20 per cent of interest in the business and helps us extend the brand outside of the U.S. and in building connection and assets outside the U.S.

David:

And Damon, eight and a half years ago, you went from being effectively a U.S. big cap business to a global business, and you run that global business. And it’s just coming around for its eight- and three-quarter year anniversary at the end of September and it’s got a very enviable track record.

Damon:

So we’ve, as you mentioned, been managing portfolios to this strategy since 1989 for almost three and a half decades this point, we’ve taken that investment philosophy and process and applied that into managing the global growth strategy that’s just past eight and a half years.

At the end of the day, what we’re trying to do is drive mid-teens type returns in the underlying companies in the aggregate portfolio to drive mid-teens return growth profile for our clients over the long term.

David:

Excellent. Now tell me, investing across the gross spectrum. It’s very interesting to me that you have, on one side of the spectrum, high grade businesses, and on the other side of the spectrum, you have growth businesses, but much more reliable growth. Do you want to talk about that investing across the growth spectrum?

Damon:

Sure, absolutely it’s, as I mentioned, we’re trying to drive mid-teens type returns over the long term supported by underlying mid-teens earnings per share growth within the companies.

But there is a spectrum of growth companies, right? We’re very happy to own a company like Amazon or Workday, higher growth businesses. They typically come with higher prices, there’s no secret that these are outstanding growth franchises.

We’re happy to pay a higher price when the underlying fundamental support it. But we’re also happy to own companies at the other end of the spectrum like a L’Oreal or an Abbott Laboratories, which might not grow in the mid-teens, certainly not for any extended period of time, but we think they can grind out solid, you know, double digit low teens, earnings per share growth, total returns over the long term as well. So, it’s marrying together that those different opportunities to drive that outcome at a portfolio level. That helps us manage valuation, that helps us manage risk, and ultimately drives a great outcome for the client.

David:

And, in terms of context of investing across the growth spectrum, why don’t you give me an example, something like Workday would be a good example. And where it fits and what the investment philosophy behind the acquiring what day was and how did that come into your portfolio?

Damon:

Absolutely, it’s a newer addition to the global growth fully over the past two quarters really starting in the second quarter and then continuing into the third quarter of this year. We’ve built up, what is now a 4.5 per cent position within the global growth strategy.

It is at the higher end of that growth spectrum. So, we believe this business can grow earnings and free cash flow at a 20+ per cent rate for many years to come.

And I guess two things kind of kept us at bay up until very recently. One valuation. It was, a little more dearly valued over its historical life. It’s been no secret that it’s been growing at a very fast pace. Given what unfolded in twenty 2022, valuations across, quality growth companies and certainly within the software as a service or SASS space has come down. So, valuation has corrected, and we were able to buy it at about 30 times free cash flow, which we think again for a 20 per cent plus grower, we think that’s an attractive valuation.

We were also waiting for the platform to mature a little bit. So, the history, if you don’t know about Workday, it’s, its primary focus is on human capital management or HCM. So, it has cloud software for human capital management. They wrote the software from the ground up, born in the cloud and, as they’ve scaled, they’ve become the leader in that space. We wanted to see it broaden out its platform a little bit. And what we’ve seen is that they’ve also written financials cloud platform.

So enterprise resource planning, financials, is a big chunk of that. They’ve written that soft from the ground up. It’s taken a little more time for the financials segment of the market to move to the cloud, but that’s happening now.

And we we’re seeing Workday’s business mature companies like Salesforce, a leader in cloud, adopting their financials cloud platform, that’s a pretty big stamp of approval, among other large corporations as well. So we see that vertical and they now have a couple of legs to the stool now.

We think is going to drive really strong growth for the long term. Valuations reasonable, they’re becoming a more global business as well. So, it’s a great example of just being patient studying high quality businesses for years. When the ingredients are in place to support a really robust thesis at a fair value, then we’re happy to build a position.

David:

Damon, that was fantastic. Ladies and gentlemen, we’ve been partnered with Polen Capital for approximately two and a half years now. And when you see how highly credential people like Damon Ficklin are, and they have come down every six months since we partnered with them, they’re very, very keen to come and tell their story in Australia, and Montgomery Investment Management is blessed to have people, the quality of Damon, and a company Polen Capital to distribute.

The Polen Capital Global Growth Fund owns shares in Workday, L’Oreal, and Abbott Laboratories. This article was prepared 25 September 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies, you should seek financial advice.

INVEST WITH MONTGOMERY

Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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