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In this video insight, I am joined by Rob Forker, the portfolio manager of the Polen Capital Global Small and Mid Cap Fund. We discuss Polen Capital’s strategy of selecting elite companies from a pool of 8000 global stocks based on their five guide rails. Rob also highlights Polen’s approach to investing across the growth spectrum, balancing slower-growing, stable companies like Cochlear with high-growth firms like Globant. Despite the challenging market conditions, Rob remains confident in their strategy, believing that earnings growth will ultimately drive long-term stock price appreciation.

Transcript:

David:

Hi I’m David Buckland, and welcome to this week’s video insight. Today, I’m being accompanied by Rob Forker. For those who don’t know, Rob is the portfolio manager of Polen Capital’s global small and mid-cap fund.

Rob, you have about 8000 stocks to choose from in the global space in the small to mid-cap area, and you have to go all the way down to try and get the best 35 stocks or approximately 35 stocks in the world. How do you do it?

Rob:

It’s a hard task, but one we enjoy doing. So, finding the best of the best is what we’re all about. We want to find the most elite companies we can find globally wherever they reside, Australia, continental Europe, America, Japan, wherever. The way we do it is we apply our proven five guardrails that we’ve been executing at Polen Capital for almost 35 years. Those are:

1. Real organic revenue growth,
2. High end or improving margins,
3. High returns,
4. Abundant cash flow,
5. And a strong balance sheet.

And at the end of the day, what we’re looking for is companies that have strong earnings, have strong cash flow, and a fortress like balance sheet because those are quality companies that can be durable over the long term.

David:

And it’s interesting that out of your portfolio of, I think it’s 33 stocks at the moment, the average market capitalization is about 8.5 billion Australian dollars, which actually would put it in the top 60 on the ASX and be similar sized to something like Qantas (ASX: QAN) or Mirvac (ASX: MGR) so it’s interesting that, for Australians, that seems quite big, but by global standards, they’re still categorized as a small or medium sized type businesses.

Rob:

Yeah, no question, so we find companies of course globally, and small cap, mid cap is a bit of an art as to how you define it but what we believe is that the inefficiency of the asset class is clear. So, a typical company that we’re looking at in our class has 7 to 8 analysts. For reference, Apple has 55. And so, the beauty of what we do is that we’re looking at under explored companies that we believe have a secret sauce. Now it’s our job to figure out what that secret sauce is, but what we do, as an example, is look at the companies that have no self-side coverage. So, this is an opportunity and one that we relish in.

David:

That’s good. Now, one of the interesting graphs we get from Polen Capital is investing across the growth spectrum. On one side of the spectrum. You’ve got these very sexy, very high growth companies, but are earning money. And on the other side of the spectrum, a little bit more ballast in the portfolio. Can you just explain for the small mid cap global audience? Investing across the growth spectrum and how you think about it.

Rob:

Yeah, so on the safety side, these are to consumer staples companies or healthcare companies where they’re a lit little bit slower growing, low double digit earning. So, it’s still great, but slower going. Cochlear (ASX: COH) would be a great example, a fortress in market share and their constant research and development (R&D), typically grows earnings at 12-14 per cent.

On the far end, we call these growth companies, they typically grow earnings 30 – 40 per cent. An example would be Globant, which is an IT consulting firm at the forefront, of what they do. They’re basically a mini-Accenture. And so those type of companies are growing faster.

We want both because we appreciate the safety and the growth elements that can help you in bad times and give you outsized returns in good times.

David:

So, if we look at the fundamentals of the total portfolio let’s just sort of spend a minute or two on that.

Rob:

Absolutely so, when you put it all together, this is a portfolio that trades at roughly 25 times earnings on a 12-month basis.

We believe earnings growth is nearly 20 per cent per annum.

David:

For some years?

Rob:

Yeah, where we forecast out 5 years in our investment time horizon. We want to think and act like owners when looking at these great companies, and what they can do over the long term.

The balance sheet is nearly net cash, so no balance sheet risk to speak of. As I mentioned, strong cash flows. We want companies that self-fund, which is quite unique in this space. Many small cap managers own unprofitable companies where they’re betting that things will get great.

David:

Have to go back to the market for equity, on a regular basis.

Rob:

We don’t want to do that. We don’t want to buy what will be quality. We buy what’s proven to be quality today. And this is the beauty of the menu that we have of nearly 8000 companies. We can be choosy. We want to own elite companies.

David:

And I guess the elephant in the room Rob, we launched this in Australia although the fund out of America is actually, well, Boston where Rob’s based is actually a bit older than that, but we actually pick the timing to perfection in terms of the bigger the market, so October 2021. So, it’s coming around for its, it’s two year anniversary. It’s been a very, very rough ride for the early investors.

Yours truly as one of them.

Let’s just give it give it some context. It’s obviously been a very rough 24 months. Do you want to sort of just spend a few minutes on that?

Rob:

Yeah, and yours truly as well. So, I eat my own pudding, I’m an investor and my children are investors you know, I am betting on the success of this strategy as many of you are. The elephant in the room is that 2022 was bruising, just literally awful.

We weren’t certainly the only ones that had the bruising. This was a global phenomenon, particularly in small to mid caps. This year, what’s been surprising is the bounce back has not been there. The strategy is certainly not doing poorly, but it hasn’t had the type of returns that that many of the large cap strategies have had, small cap in general has been toward left behind. What we focus on is the fundamentals of the business.

We believe that earnings growth for our companies was 12 per cent last year. We believe that earnings growth will also be very strong closer to that 15 to 20 per cent level that I was talking about. And that’s what we are focused on. Price to earnings (P/E) multiples as Roger and many astute investors talk about, P/E multiples are confidence, they go up and down. But we believe over the long term that stock prices follow earnings growth, and that’s what we think will happen over the long term. But certainly, are, we didn’t want to start this way. And it would have been better had we not, but this is where we are in there in lies the opportunity.

David:

Alright. Ladies and gentlemen, that’s all we have time for this week. As many of you know, we’ve had a very, very good relationship with Polen Capital for about 2 and a half years now. Rob, Damon, and many members of the team come out pretty much on a 6 monthly basis. And, we have been blessed to partner with an organization of such great quality.

The Polen Capital Global Small and Mid-Cap Fund owns shares in Globant. 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 Globant, you should seek financial advice.

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• European stocks drop to their lowest level in more than six months
• Swiss franc stronger against most European counterparts (NOK and SEK firmer)
• Overnight index swaps still not

A global bond market selloff European equities sharply lower and triggered some safe-haven flows towards the Swiss franc.  The EUR/CHF daily chart shows prices have tentatively fallen towards the lowest levels since September 21st.  Risk aversion is clearly in place given US lawmakers were able to tentatively avoid a shutdown but stocks are still selling off.

Earlier in London, the final PMI readings showed Germany and France heavily remain in contraction territory.  German manufacturing activity posted its 15 straight contraction, but did deliver a 3-month high.  France manufacturing PMI posted its 8th straight contraction and worst reading since May 2020.

The global growth outlook seems poised to deteriorate and that should lead to gloomier prospects for Europe.  As soft landing hopes disappear in the US, the chances of a de-risking moment grow.  If European bond yields continue to rise, the Swiss franc should outperform in the short-term.

EUR/CHF Daily Chart

As financial conditions continue to get uglier across Europe and that is starting to lead to more safe-haven flows towards the franc.  Short-term downside seems like it could target the 0.9500 region.  If bearish momentum remains in place, price action could fall towards the 0.9265 level which is the 78.6% Fibonacci retracement of the 2015 low to 2018 high move.

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