Polen Capital Management sees room for focused US equity Ucits

Taking an extremely active and focused approach to buying into US equity makes it possible to achieve downside protection via a long only portfolio, according to Polen Capital Management, which has launched a Ucits version of its existing focused US equity mutual fund.

The Polen Focus US Growth Fund is a portfolio of about 20 stocks aiming to beat the S&P 500 index while exhibiting lower volatility. It reflects Polen’s objective over the past 25 years managing money for US investors, which has attracted institutional and wealthy individuals concerned as much about capital protection as the ability to outperform benchmarks.

Stan Moss, CEO of Polen Capital Management, said this approach explains how the manager has been able to grow to some $5bn in AUM, and why it believes the track record positions coupled with a Ucits vehicle positions the business for growth outside the US.

The Ucits is domiciled in Ireland, and offers dollar, hedged sterling and hedged Swiss franc share classes, with a total expense ratio on institutional shares expected to be around 1.25%.

“Ucits is what a manager like us should be doing,” Moss said.

Moss said Ucits was “the gold standard” for any manager looking to do business in Europe but also with an eye to growing business in other regions such as Latin America – important for Polen because of its Florida base and existing links to Latin American investors, including the significant opportunity opening up in Mexico following changes to pension regulation in that market.

The focus on growth companies that are cash rich, cash generative, with solid books and that hold leading positions in their industries has lead the portfolio to stocks such as Apple and Oracle in technology, and the US healthcare sector. Generally the portfolio would avoid cyclical or energy stocks, although there is no deliberate focus on specific sectors – the portfolio will go where the stocks are.

The key issue always is earnings per share. The companies in the portfolio are growing theirs by an average of about 15%, and the idea is that the portfolio in turn will then grow in equal measure. This strong EPS growth reflects the higher ongoing levels of R&D these companies engage in, and their ability to sustain pricing power.

This is also another way to look at the index. The S&P 500 is up considerably since June 2011, Moss said, but picking apart the drivers of that gain shows that some 95% is down to expansion of multiples, whereas just 5% could be said to be driven by EPS growth.

Over time that will correct itself, and those companies that are growing EPS by double digits will stand out even more, he suggests.

Another broader issue to consider is that Moss does not believe that a so-called Great Rotation is occurring with respect to US equity. He believes that the investments being made into US equity are coming from investors cash, rather than representing a switch away from fixed income into equity.

Also, many of these equity investments are going to slower growing companies.

The Polen approach means the portfolio will hold very high proportions of stocks compared to the index – each stock may account for 5%-6% of the portfolio versus the 1% level that the stock might represent in the index. Moss said this higher level of exposure is called active share in the US, and is part and parcel of the Polen way.

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