Have you ever wondered whether your portfolio was optimally allocated or not? Or, in other words, do you ever sit back and think: “is there a better way I could have invested my portfolio over the last 20 years?” With the benefit of hindsight, we know that there is almost always a “better way” we could have invested.
But unfortunately we do not have the benefit of hindsight with investing! We can only take the information we have available and make what we think are the best decisions possible for our long-term goals.
That is, unless you actually go back and analyze 10,000 different ways you could have allocated your portfolio, and compare the results of your analysis to your actual portfolio’s performance and risk level. That’s precisely what Polen Capital did, and the results may surprise you.
The 10,000 Portfolios Project
Polen Capital is an investment manager whose stated commitment is to own/manage a concentrated portfolio of high quality companies with durable competitive advantages, robust returns on capital, and healthy balance sheets.1
The question they sought to answer with the “10,000 Portfolios Project” ultimately was, could we have done better?
To conduct the study, Polen Capital asked research firm FactSet to randomly generate 10,000 unique portfolios of 20 stocks, starting on January 1, 1989. Since Polen Capital has an approximately five year turnover with the positions they choose, they had FactSet mimic that in their study. Polen also added a few distinguishing factors to the data set to try and make it as representative as possible, such as screening for stocks with a greater than $1 billion market capitalization and scaling that number up over time. The results of the study are telling (to note, being in the upper left corner implies lower risk and higher returns):
Here are the findings in table format, which make it a bit easier to digest:
| Annualized Return | Standard Deviation | |
|---|---|---|
| Polen Capital | 14.5% | 17.0 |
| Median Portfolio (randomly generated) |
12.2% | 19.6% |
| MSCI USA Quality | 12.1% | 19.3% |
| S&P 500 | 10.4% | 18.3% |
Source: FactSet
Polen Capital will admit themselves that the findings of this study are not meant to outright vindicate their strategy, nor to prove that there is no better way to invest. But at the same time, producing higher returns with lower risk can provide an investor insight for what has seemed to work well historically. As Polen points out in their research piece, the data makes clear that concentrated portfolios, even when randomly constructed, can produce very competitive returns relative to the market without a significant increase in volatility. That makes them worth exploring. 1
Want to Learn More about Polen Capital’s Strategy? Contact WrapManager
If you are interested in learning more about the investment philosophy and leadership team at Polen Capital, please just reach out to one of our Wealth Managers by phone or email. We can walk you through Polen’s investment materials as well as answer your questions about their process. At WrapManager, we use technology that allows our Wealth Managers to “share their screen” with you, we can review the manager’s materials together while on the phone. Of course, if you wish for us to simply send you materials so you can review them yourself, that is perfectly fine as well. Just give us a call at 1-800541-7774 or send an email to wealth@wrapmanager.com to get started.
Source: 1. Polen Capital
The information provided in this report should not be construed as a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in the composite at the time you receive this report or that the securities sold have not been repurchased. The securities discussed do not represent the composite’s entire portfolio. Actual holdings will vary depending on the size of the account, cash flows and restrictions. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. For a complete list of Polen’s past specific recommendations holdings report and current holdings as of the current quarter end, please contact Polen Capital at info@polencapital.com.
