The investment philosophy of the Polar Capital North American team is driven by fundamental and bottom-up stock analysis, focusing on both long-term value creation and value. The philosophy is based on the simple understanding that the team is investing clients’ savings in American businesses with the goal of compounding those savings over the long term at an attractive rate of return. They believe the best chance of doing this successfully is to invest in companies that sustainably compound at attractive rates over time and to invest in them at attractive valuations.
A focus on long-term value creation stems from the notion that, as an owner on behalf of clients in shares of companies, the team wants to see an attractive return (through growth and capital deployment) from their underlying businesses’ activities. Durable businesses whose future cash flows can sustainably compound at attractive rates provide a fundamental performance tailwind over time as well as a fundamental margin of safety.
Value creation cannot be looked at in isolation though. A focus on finding shares that offer good value is also key to driving attractive shareholder returns. The aim of the investment process is to identify attractive long-term value creation that is not adequately encapsulated in the share price of a company. This is done through a disciplined approach to valuation that requires long-term thinking and judgement. This increases the probability of a revaluation of a business’s cash flows, which can supplement returns, and creates a long-term valuation margin of safety.
Therefore, a dual focus on value creation and value results in more ways to win: value creation provides an underlying compounding tailwind to the portfolio, while buying at an attractive price results in a higher chance of a subsequent revaluation of the company’s cash flows. It also provides a two-fold long-term margin of safety – a fundamental margin of safety and a valuation margin of safety.
