The Polen Capital Global Growth Strategy – and its low portfolio turnover
One of the main characteristics which sets the Polen Capital Global Growth strategy apart is its very low portfolio turnover. Owning great quality businesses, with four investment guardrails – a sustainable 20 per cent return on equity, exceptionally strong balance sheet, stable or growing profit margins and abundant free cashflow – helps sharpen the focus when doing the iterative deep dive research.
In Australian Dollar terms, the strategy has delivered its investors an annualised return over the six years to December 2020 of 16.42 per cent, after all fees and expenses, an out-performance of the MSCI All Country World Index (ACWI) exceeding 5.6 per cent per annum.
When analysing Polen Capital’s Global Growth’s 27-stock portfolio, the only recent shift included adding Amazon as a 3.0 per cent position.
A new holding
Amazon is one of the strongest businesses in the world and Polen believe it is poised to leverage its many strengths and its competitive position with compound earnings of around 30 per cent per annum over the next five years. Polen have been following Amazon since well before the inception of the Polen Capital Global Growth Strategy, and in fact owned it in its Focus US Growth Strategy in 2008.(1)
The strength of the Amazon business and its ability to drive and eventually capitalise on the shift to e-commerce has never been in question. But for most of the company’s life, it did not meet Polen’s investment guardrails and seemed more than fully valued based on what Polen could comfortably predict for future free cash flow. That said, the company has been incredibly adept at allocating capital and excess free cash flow into businesses with large and attractive total addressable markets.
Amazon Web Services (AWS), today’s leader in cloud infrastructure, is a good example. These investments have taken time, but Amazon’s management have a very long-term orientation. In the case of AWS, it took over a decade to build sufficient data centres, which now serve as an added competitive advantage for the business. New entrants simply do not have the capital to invest to gain sufficient scale at this point, so we think there will only be a few horses in this race. While these newer businesses like AWS and Advertising were developing, Polen continued to watch and study Amazon closely.
Amazon is now firmly within Polen’s investment guardrails and is well positioned to continue to compound revenue at high rates while expanding margins. Despite ongoing heavy investments in areas such as delivery infrastructure, data centre infrastructure and shipping, the profits from AWS, Amazon Prime and Advertising are now more than offsetting the company’s heavy investments, which incidentally serve to strengthen its competitive advantages.
With respect to valuation, Amazon is a different business today than it was only 10 years ago. AWS, Prime and Advertising are fast growing and quite profitable businesses and represent much more than 100 per cent of operating profits. Said another way, there is a strong case to be made that just AWS and the Advertising business may support much of the valuation, on top of the e-commerce business, which is among the strongest businesses in the world, experiencing strengthening tailwinds, resulting from the global pandemic.
Provided that earnings growth comes through, Amazon would only have to sustain a low-20x P/E multiple five years from now to produce a double-digit annualised return from today’s price. Given Amazon’s dominance and the secular tailwinds, Polen believe that its normalised multiple could be higher than low-20s, which would support mid-teens average annual returns or better. In short, Amazon is one of the world’s most competitively advantaged businesses with large and attractive markets to deploy huge sums of free cash flow at high rates of return.
(1) The Polen Capital Focus US Growth Strategy was launched in 1989.
Applications for the Polen Capital Global Growth Fund are now open. You can read more about the fund here and apply online: Polen Global Growth
* Performance for prior periods is based on the actual performance of the Polen Capital Global Growth strategy managed by Polen Capital since 31 December 2014, adjusted for fees and converted to AUD.
You should read the Product Disclosure Statement (PDS) before deciding to acquire the product.
The Polen Capital Global Growth Fund invests using an identical strategy to the Polen Capital Global Growth strategy. Past performance is not a reliable indicator of future performance.
Units in the Polen Capital Global Growth Fund (ARSN: 647 518 723) (Fund) are issued by the Fund’s responsible entity Fundhost Limited (ABN 69 092 517 087) (AFSL 233045). The Fund’s investment manager is Montgomery Investment Management Pty Ltd (ABN 73 139 161 701, AFSL 354 564). The fund’s sub-investment manager is Polen Capital Management, LLC.
The PDS contains all of the details of the offer. Copies of the PDS are available from Montgomery Investment Management on (02) 8046 5000 or at www.montinvest.com. Before making any decision to make or hold any investment in the Fund you should consider the PDS in full. An investment in the Fund must be through a valid application form attached to the PDS or via the online application form. You should not base an investment decision simply on past performance. Past performance is not a reliable indicator of future performance. The investment returns of the Fund are not guaranteed, and so the value of an investment may rise or fall.
The information provided is general in nature and does not take into account your investment objectives, financial situation or particular needs. You should consider your own investment objectives, financial situation and particular needs before acting upon this information and consider seeking advice from a licensed financial advisor if necessary.