After five years working as a deep value investor, Dan Davidowitz figured out it wasn’t for him. ‘I realized it was hard and doomed to mediocre results,’ says the now Citywire AA-rated manager.
‘We’d only buy companies that were cheap relative to the market and those were broken. I was running really fast on a treadmill and going nowhere.’
Davidowitz has come a long way since then. He changed his investment philosophy, junking an opportunistic, heavy turnover approach in favor of a long-term, concentrated buy-and-hold ethos.
All that was left was to find a company that shared his newfound zeal for patient investing. ‘There are not a lot of them in the US,’ he says.
His search took him to Polen Capital, the Florida-based boutique investment house founded in 1979 by David Polen. Davidowitz joined the firm in 2005 and in 2010 spearheaded the launch of the firm’s first mutual fund, Polen Growth.
Davidowitz and co-manager Damon Ficklin, also AA-rated, have amassed more than $1 billion for the fund since its launch, while the firm, of which Davidowitz is now chief investment officer, oversees over $10 billion in its US and global growth strategies. Investors, such as Scott Welch of Dynasty Financial Partners, who we profiled here, have been won over by returns that have been among the strongest for large-cap growth funds, coupled with drawdown that ranks among the lowest.
The fund has rallied over the past three years after a subdued start
Less is more
The fund’s performance mounts a strong counterargument to those who place diversification above all else in their bid to reduce risk. Housing just 21 stocks, the fund is highly concentrated and boasts extremely low turnover: in its five-year lifetime, the managers have bought just 26 companies and sold only 25.
But although that may cause alarm bells to ring for some, the fund’s path to returns has been smoother than most. Over the past three years it has delivered 50 .7%, well above the average 32.3% from funds in the Equity – Large-Cap Growth category, with a maximum drawdown of 7.1%, compared with the double-digit drops suffered by around two-thirds of rival managers.
Davidowitz argues that owning such a relatively small number of companies imposes a greater degree of risk control. ‘If you are going to own 20 companies, you better make sure each of them has a super-strong balance sheet,’ he says.
‘It forces a discipline to only find the best companies you can in the US.’
Coupled with that selective approach is an emphasis on holding stocks for the long term, echoing Warren Buffett’s famous claim that ‘our favourite holding period is forever.’
Polen Capital managed 14 years as an owner of American Express and Microsoft, although the two no longer feature in the Polen Growth fund. Of the fund’s current holdings, Accenture and Oracle are the longest standing stocks, having been held for 10 years in both the fund and the separately managed account, run according to the same strategy, that predates it.
‘We like to say we act like we own the entirety of the businesses we invest in,’ Davidowitz says. ‘You wouldn’t trade it: you’d think, are they generally executing how they should be? Is this business too good not to own?’
That approach necessitates a long-term view on the prospects for companies they invest in. ‘We take as long a perspective as we can,’ he says. ‘We need a fairly clear picture over the next five years, or we’re not interested. We need fairly stable growth companies. We look at companies that have really big moats around their businesses.’
Polen Growth has bucked the trend of withdrawals from active US equity funds
Davidowitz and Ficklin’s strong focus on earnings growth has led them to a portfolio that is made up of companies from the technology, consumer and healthcare sectors, and not much else.
Google parent Alphabet is their biggest holding, followed by Visa and Nike. This trio taps into the three big themes running through the fund: the movement of advertising from offline to online, in which Google and fellow holding Facebook dominate; the movement of payments from cash to digital, a boon for Visa and smaller holding Mastercard; and the continued appeal of sportswear, helping Nike thrive.
But they are keen not to portray themselves as thematic investors. ‘We don’t take a thematic view of the world,’ Davidowitz says. ‘The companies come first and the theme comes second.’
Valuations also have their part to play, despite the pair’s emphasis on a low turnover, buy-and-hold philosophy. Although they are keen not to respond to stock market noise and share price fluctuations, they will not hold on to a stock come hell or high water.
Over five years the fund is in line with peers, but few can match it over three
Facebook is a case in point. Having resisted buying at initial public offering due to the lack of mobile revenue and desktop advertising, they invested once the revenue picture became clearer. But as the share price took off and the social networking giant announced plans to spend $22 billion acquiring WhatsApp, Davidowitz and Ficklin sold out, buying back in only at a more moderate valuation. ‘We’d rather not do that unless we have to,’ Davidowitz says.
‘Valuation comes at the end of the process,’ Ficklin adds. ‘We study the best businesses to own. We don’t start with what’s cheap and convince ourselves it is good. We do care about valuation, but small differences aren’t going to drive the decision.
‘Not every valuation is right for us. We are willing to pay higher multiples but there’s a point at which that equation starts to break down.’
With a fund management style that is so focused on holding onto companies, rather than buying and selling them, Davidowitz and Ficklin admit they probably spend less time looking at new investment opportunities than others. A team of nine is tasked with evaluating companies, and three or four will tend to make it into the portfolio every year.
‘We cover a smaller number of companies than others, but the research is as deep if not deeper,’ Davidowitz says. ‘We say no to a lot more than we say yes to. There’s a whole lot of research but not a whole lot of activity.’
‘A lot our success is down to what we don’t own,’ Ficklin adds. ‘A lot of people will try to play the game of buying a terrible business that’s attractively valued.’
Frank Talbot, head of US research, Citywire
Polen Growth’s returns have been exceptional over the past three years. The high-conviction strategy has paid off handsomely, but a quick glance at the performance of the fund since its inception reveals a fund that is only on par with the market’s return over that period.
There was a period from the start of 2013 to August of that year when the market was extending its rally and the fund was going sideways. This is the risk investors take when investing in a portfolio that is fundamentally different to the market.
However, to its credit, the fund has generally held up well during the market’s tricky periods, which speaks to the quality of companies it is invested in.