Free cash flow, low levels of debt and true organic revenue growth are just a few of the requirements that the managers of Amundi Polen Capital Global Growth believe can lead to high returns with downside protection. 
The €636m fund is overseen by Damon Ficklin. Over his 17 years at Polen Capital, Ficklin (pictured) has amassed five key rules when it comes to selecting businesses for high quality growth portfolios.
This process is referred to as the five ‘investment guardrails’, which when applied to all the eligible businesses in the world leaves a concentrated portfolio of 25-30 holdings.
“This concentrated approach is a big advantage in our ability to produce excess returns,” said Ficklin. “It also allows us to reduce risk by concentrating in only the best companies and nothing less.”
Performance of fund vs sector & benchmark since inception
Source: FE Analytics
While the Polen Capital Growth fund was launched in 2015, the fund was absorbed by Amundi to become the Amundi Polen Capital Growth in November 2018.
Since November 2018, the fund has returned 46.86 per cent. In comparison, its MSCI AC World benchmark has returned 19.56 per cent while the FO Equity – International sector is up 15.14 per cent.
“We’ve been able to produce excess returns with a lot less volatility and a lot less of the downside,” said Ficklin.
With a holding period of five years on average, once Amundi Polen Capital Growth has identified the right businesses, the manager is confident in its ability over the long term.
Without any geographic constraint on the companies the fund can own, each holding must go through the five investment guardrails which have been in place since the inception of Polen Capital.
The first is a return on equity of 20 per cent or greater in an underlying economic basis. Secondly, he looks for companies with better than average earnings and free cash flow growth.
“We’re talking high single-digit, low double-digit earnings growth over the long term,” the manager explained. “We would want our companies to grow much faster than that but that’s the minimum threshold.”
Thirdly, Ficklin wants to see typically strong and improving margins, followed by the fourth guardrail: low levels of debt.
“We’re not big fans of leverage and we’re looking for strong balance sheets,” he said.
The portfolio manager outlines the fifth stipulation as displaying true organic revenue growth.
“When you’re investing for the five plus year horizon and seeking steady durable double-digit earnings growth over time, we really believe you need to have some underlying revenue growth that’s persistent,” he added.
“Hard to leverage margins forever without that underlying growth engine.
“This can of course be supplemented with acquisitions, but the business doesn’t need to acquire just to grow.”
Ficklin outlined that any one of those five guardrails remove a lot of companies from the universe and subsequently reduces a lot of risk.
“When you’re looking for all five, it sets an incredibly high bar,” he said. “That takes a big global universe down to a manageable number very quickly.
“The guardrails get you down to a few hundred companies. Then we get down to our coverage universe which is less than 150 companies in the world.
“These are the true candidates for the global strategy.”
Excluding companies that are truly cyclical, lacking competitive advantage or are highly economically sensitive reduces the number before the guardrails even come into consideration.
“We’re left with a universe that’s quantitatively and qualitatively got great growth companies,” said Ficklin. “Most of which are secular growth companies.”
Companies are not omitted from the portfolio due to geopolitical and macroeconomic events, rather the weightings are adjusted to reflect the global situation.
“It’s not as if we’re constructing the portfolio for any supposed scenario over the next 12 to 24 months,” he said. “We’re building it for the next five years and expect to own them through tough times.”
An apt example would be Visa and Mastercard, two companies within the top holdings that have been impacted by the reduced number of cross-border transactions.
“They are very strongly positioned from a financial point of view. They also have exceptional economics, so there’s no real risk to the ongoing enterprises in the near term,” Ficklin said.
The manager has added to Paypal, a beneficiary of the structural trend of digital payments, yet one that is less exposed than Visa and Mastercard.
“We trimmed our position size in Visa and Mastercard ever so slightly, making space for Paypal as it benefits from many of the same long-term trends,” he said.
“But the vast majority of its business is solely exposed to the highest growth segments of the market right now.”
The manager explained that the positioning of Amundi Polen Capital Growth allowed it to be sufficiently protected during the tumultuous first half of the year.
“We captured about 60 per cent of the downside during the first quarter of the year,” he explained. “With 100 per cent of the upside in the second and third quarter to date.”
He added that he believes the fund is well positioned for both tough times and for growth, despite the high level of economic uncertainty that still surrounds the markets.
“We don’t need to predict the future to deliver great results,” he finished.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date, the Amundi Polen Capital Growth fund has returned 13.06 per cent, while the peer group returned 0.36 per cent and its benchmark made 1.7 per cent.
It has an ongoing charges figure (OCF) of 0.85 per cent and has an FE fundinfo Crown Rating of five.