06 May 2022

By Polen Capital

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Polen Captial Global Small and Mid Cap 1Q22 Commentary

 

There is no doubt the changing landscape will impact many companies globally, but Polen Capital seek to own companies that can thrive and survive in any environment, including this one. That focus is unchanged. Portfolio Manager Rob Forker provides an update on portfolio positioning, using the current volatility in the market opportunistically and buying companies Polen have researched and known for years, but where we had concerns about valuation.

TRANSCRIPT
There were a number of notable events in the quarter, including continued inflationary pressures and war. The incremental uncertainty caused volatility in the market and considerable selling pressure on a variety of stock prices globally. Overall, the first quarter of 2022 was challenging. Quality growth did not perform well and our style of investing was out of favor. To highlight this, amongst the best performing industries were airlines, metals and mining, energy, and of course, defense stocks. Historically we’ve avoided these industries because returns are low and their services are commoditized. Instead, we typically own technology, healthcare and consumer companies where we find durable high quality companies that are competitively advantaged.

There is no doubt that the changing landscape will impact many companies globally, but at Polen Capital, we seek to own companies that can thrive and survive in any environment, including this one. That focus is unchanged, regardless of external events.

On portfolio positioning, we have used the current volatility in the market opportunistically. We are buying companies that we have researched and known for years, but where we had concerns about valuation. The market drawdown has allowed us to purchase great companies at great prices. Specifically, we initiated a new position in Euronext. The company is number one in cash trading in Europe, number one in bond trading, number one in debt listings and number two in derivatives trading. We believe the management team is excellent with a long track record of thoughtful M&A. Overall the company’s fundamentals are promising and the valuation was very attractive after the recent pullback.

We believe the companies we own in the strategy are durable, high-quality companies. They have competitive advantages that are not easily replicated. Their effective management teams constantly reinvest in the core business to get stronger over time. And notably, our own companies are the beneficiaries of various secular growth tailwinds. We have owned Thule Group since the inception of the fund. The company benefits from the secular trend towards active and outdoor lifestyles. Their brand is built on a heritage of quality and user influence product innovation. Thule is also led by a great management team that has strengthened the company during the pandemic.

We believe that over the long term, earnings and stock prices converge. This was not true this quarter. Periods like this can persist, but our view is that fundamentals matter and will win out. It is clear that the underlying health of the companies we own remain strong, but we are actively monitoring a variety of risks. We are confident that we own a portfolio of companies that in our view are competitively advantaged. We expect that our companies can continue to deliver results and adapt if market conditions change. That’s the beauty of high quality companies. They are led by great management teams with fortress balance sheets, allowing them to pivot as needed.

 

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