The Polen Capital Global Growth ETF gained 11.42% during the fourth quarter of 2023, outperforming the MSCI ACWI Index (up 11.03%). The Morningstar Global Large Stock Growth peer group returned 13.01% in the quarter.
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Quarterly Portfolio Manager Commentary
During the fourth quarter, the Polen Capital Global Growth ETF (the “Portfolio”) was up 11.62%, versus the MSCI ACWI Index (the “Index”) return of 11.03%. The market has been trying to predict the direction of monetary policy all year, and a recent cooling of inflation seems to have bolstered the case for rate cuts in 2024, sparking a strong finish for this year.
For anyone who needed a reminder of the futility of macro forecasting, 2023 provided just that.
As 2023 began, inflation was still running well above historical averages. The debate centered on whether we would have a mild or severe recession in the year’s second half. As the year progressed, the “wall of worry” only steepened from the collapse of Silicon Valley Bank Financial in March and subsequent fears about credit contagion to Chinese economic weakness and rising geopolitical tensions. All this followed on the back of 2022—a very challenging year marked by 40-year high inflation and a historically rapid tightening cycle that took rates from near zero to 4.5%.
Given this backdrop, one could have made the understandable, tactical decision to take a more conservative or “wait and see” approach in 2023. However, as we’ve seen time and again throughout history, the short term doesn’t always unfold as expected. As a measure of global equities, the MSCI ACWI Index rose nearly 23% in 2023, the sixth-best annual return since the Index incepted in 2001. Impressively, more than 14% of this return came in the year’s final two months as optimism grew around a soft-landing outcome and the potential for interest rate cuts in the first half of 2024.
None of this is to suggest that the path of the global economy or equity markets is now clear. The truth is nobody really knows how the short term will unfold. But times like this, with rapidly shifting short-term narratives, serve to reinforce the value of having a long-term mindset.
By thinking in years instead of months or quarters, the noise around macro uncertainty tends to fall away.
Our focus is—and will always be—on keeping a very high bar on quality, only owning what we believe are among the best businesses with durable competitive advantages, strong balance sheets, and secular growth tailwinds.
In remaining disciplined in our approach, we believe our businesses are as well positioned as any to deliver above-average earnings growth in good times and bad.
As we look ahead, we expect underlying earnings per share for the Portfolio to grow in the mid-teens over the next five years. If the Portfolio delivers on that, we believe returns will roughly follow as we have observed over the long term.
Portfolio Performance & Attribution
The largest relative contributors to the Portfolio’s performance during the fourth quarter were Workday, Amazon, and SAP. From an absolute perspective, the top contributors were Amazon, Microsoft, and Workday. The largest relative detractors to the Portfolio’s performance during the fourth quarter were Align Technology, Aon, and ADP. From an absolute perspective, the largest detractors during the quarter were Align, Aon, and Estée Lauder.
Workday’s stock price was weak coming into the quarter. At the company’s investor day in late September, management provided medium-term annual revenue guidance of 17-19%. Many investors were likely expecting annual revenue guidance of 20%+, so the 17-19% guidance may have been viewed as a tad disappointing. Following the investor day, Workday’s stock price rose significantly during Q4, buoyed by the company’s fiscal Q3 2024 earnings report, which was better than anticipated and included management raising revenue guidance for their fiscal 2024. We view the long-term guidance provided at the investor day as likely to be conservative, with ample room for Workday to continue taking share in the $100bn+ global HCM (human capital management) market. We remain confident in Workday’s ability to generate 20%+ annualized earnings growth over the next three to five years.
Amazon, which saw significant price appreciation throughout much of 2023, saw its share price increase materially in Q4 following the company’s Q3 2023 earnings report. We have yet to see the long-awaited re-acceleration in AWS (Amazon Web Services) revenue growth. However, in our estimation, the segment’s growth has likely bottomed, and we could see accelerating growth in 2024. Further, Amazon’s e-commerce business has gradually re-accelerated from 2022’s levels and, perhaps most importantly, the company’s margins and free cash flow have rebounded materially from last year. This rebound in margins and free cash flow at Amazon has been a key component of our long-term thesis for the business, and we expect the improvement in these metrics to continue into 2024 and beyond (though perhaps not linearly) as the company continues to optimize costs and capital expenditures. Our position in Amazon reflects our positive long-term expectations of the business, and it is currently our largest absolute weight in the Portfolio.
Like Workday and Amazon, SAP’s stock price rose significantly in Q4 after the company reported its Q3 2023 earnings. Importantly, SAP’s transition to the cloud (a core part of our thesis on the business) continues at pace, and the company is seeing both robust cloud revenue growth and expanding cloud gross margins. Management is guiding cloud sales growth through 2025 in the mid-20% range, which we view as reasonable and attractive.
We also view SAP as one of the more resilient software business models as it is an essential part of its customers’ day-to-day operations and cannot easily be turned off or scaled back.
Align Technology was the largest relative detractor during the past quarter, primarily because of disappointing third-quarter earnings results where the company’s revenue growth fell short of expectations despite easy comparisons from a year ago. Ultimately, we decided to exit our position in Align during the quarter, as detailed in the Portfolio Activity section.
Aon’s stock price underperformed this past quarter following the announcement of the company’s acquisition of NFP, a middle market insurance broker, for $13 billion. Though the deal complements Aon’s current business, it is expected to be dilutive to earnings in the near term, prompting a sell-off in the shares. We will continue to assess the merits of the NFP transaction, but it does not currently change our long-term view of Aon, which we view as a steady, durable, low-teens earnings compounder.
ADP modestly underperformed during the quarter. The company’s revenue and earnings growth has been in line with our expectations. Still, market participants appear to be concerned about the prospect of higher unemployment and lower interest rates in 2024, factors that could present modest headwinds to ADP’s growth. Our view of the business and its long-term growth trajectory haven’t changed, and we believe the company continues to execute at a high level.
Portfolio Activity
During the quarter, we did not initiate any new positions, though we did add to several existing positions, including Amazon, Novo Nordisk, and Abbott Laboratories. We eliminated two positions— Estée Lauder and Align Technology—and trimmed our existing position in Nestlé.
Amazon continues to showcase its place as one of the most competitively advantaged companies in the world, according to our research. Over the past few years, the company has made significant progress in managing costs and better leveraging existing capacity, driving a strong recovery in its profitability. Still, we think there’s additional room for improvement. Even after a solid run in the stock through 2023, we believe Amazon remains among one of the most attractively valued businesses in the market today. Our research shows that it is well positioned to deliver a mid-teens or higher total shareholder return for our clients over the next five-plus years without a Herculean effort from the business. It simply needs to continue executing on current businesses and growing into the capacity it built during and immediately after the pandemic.
Novo Nordisk is a newer addition to the strategy. Over the fourth quarter, we continued to build the position to an average weight. As a reminder, Novo Nordisk is a global pharmaceutical company based in Denmark and has long been the leader in developing insulin for diabetes patients. In recent years, the company’s innovation into GLP-1 drugs has been shown not only to help diabetics control blood sugar levels but also to have significant efficacy in weight loss. Obesity has become a global epidemic, creating materially negative knock-on effects for humans that range from an increase in cardiovascular events and, thus, higher mortality to a lower general quality of life. We believe that, over time, payors will recognize the value of these obesity treatments to both patients and the overall healthcare system.
Abbott Laboratories, a globally dominant healthcare business serving a broad range of end markets, was another position we added to in the period. The stock has come under pressure in recent quarters as the company has experienced a significant (and expected) decline in sales tied to pandemic-era COVID testing. However, we feel this amounts to little more than a distraction, as the core business continues to perform very well. Nothing has changed around our expectations for long-term growth, yet the stock’s valuation has compressed, making for an attractive opportunity to add to the position given the long-term durable growth profile of this business.
We exited our position in Estée Lauder, the global leader in luxury cosmetics. The company has faced a series of challenges in the past year, which have significantly impacted the company’s profitability. These range from a COVID lockdown in Shanghai, where their only Chinese distribution center was located; to travel retail partners placing large orders expecting a rebound in China that hasn’t materialized; to headwinds in North American makeup from brick-and-mortar closures; to being caught off guard by derma cosmetics, an area where L’Oréal is thriving. While some of these headwinds will abate, we do not expect a swift rebound, and the most recent earnings call illustrates that things are not turning around as we expected. We held a very small position in Estée Lauder—under 1%. Without the conviction to add after the recent decline and given little to no evidence that the company will be improving soon, we have better places to put our capital to work.
Align Technology represented another sale in the quarter. Align is the global leader in clear aligner teeth straighteners, having pioneered the category a couple of decades ago. Our decision to move on from the position is not a reflection of the quality of the business or the runway for growth ahead. Rather, given a still uncertain macro environment and the nature of their product as a big-ticket consumer discretionary purchase, we felt it more prudent to use the position as a source of funds to allocate to the aforementioned existing positions, which should prove more resilient with a narrower range of outcomes.
Finally, we trimmed our position in Nestlé. Over the past several years, we think the company has done a terrific job pruning its product portfolio of low-growth, low-margin, and capital-intensive businesses and reinvesting the proceeds in more attractive businesses to drive margin expansion.
At this point, we feel there isn’t much of an opportunity to drive further margin expansion, and the competition is significant for potential acquisition candidates that would be accretive to growth and margins. As a result, we believe that Nestlé’s ability to achieve our hurdle of low double-digit returns going forward will be more challenging, and we used the proceeds as a source of funds to add to businesses with a higher probability of delivering on our demanded returns.
Outlook
As we enter 2024, market sentiment has markedly improved, with consensus now expecting a soft landing and stabilization of the interest rate environment. Only a few months ago, consensus expectations called for rates to remain “higher for longer” and expectations for imminent recession were not uncommon. Regardless of the near-term direction of the global economy, our Portfolio companies are performing well, and we expect them to continue to perform well through the cycle. We believe the Portfolio’s valuation is currently fair for what we consider to be a collection of world class companies. We believe these companies are well-positioned to deliver mid-teens underlying earnings per share growth, in the aggregate, for many years.
Thank you for your interest in Polen Capital and the Global Growth Portfolio. Please feel free to contact us with any questions.
Portfolio Asset Allocation as of December 31, 2023
| By Sector | By Region | ||
| Finance | 15.0% | Europe | 34.3% |
| Consumer Discretionary | 12.4% | North America | 63.5% |
| Information Technology | 34.2% | Asia ex-Japan | 0.0% |
| Communication Services | 7.3% | Japan | 0.0% |
| Health Care & Pharmaceuticals | 20.9% | Latin America | 0.0% |
| Industrials | 3.2% | Africa | 0.0% |
| Consumer Staples | 5.5% | Australia/New Zealand | 2.2% |
| Real Estate | 0.0% | Middle East | 0.0% |
| Utilities | 0.0% | Other Countries | 0.0% |
| Energy | 0.0% | *Cash is excluded from calculation. | |
| Materials | 0.0% | ||
| Cash | 1.6% |
| By Region | |
| US Equities | 63.5% |
| Developed International Equities | 36.5% |
| Emerging Market Equities | 0.0% |
| By Market Cap | |
| Small Cap | 0.0% |
| Mid Cap | 3.5% |
| Large Cap | 96.5% |