Podcast: Orion’s The Weighing Machine with Rayna Lesser Hannaway

High conviction in quality small- and mid-cap businesses, “high hopes” for a path to recovery

Rayna Lesser Hannaway, head of the Polen Small Company Growth team, sat down with Orion’s Weighing Machine podcast to discuss what she’s learned over her career and the importance of staying the course when investing in long-term compounders, even though it might be a bumpy ride.

Podcast Highlights

Q: As we like to ask all our podcast guests, what would you select as your “walk-on” song?
High Hopes by Panic at the Disco. The lyrics tell a story about working hard in the face of adversity and the importance of staying focused on your long-term aspirational goals. As an investor for the past 26 years, I’m aware of many challenges that even the best investors face on their journeys, so this song resonates with me.

Q: Can you tell us more about your career and background?
Absolutely. I’ve invested in the small- and mid-cap space for nearly 26 years. I’ve been on the buy side for my entire career, and it has been a wonderful experience that has brought many lessons along the way. One of the most important is that with growth companies, you often find opportunities but also some potential minefields, especially at the smaller end of the market. Some companies are unprofitable, and they may have unproven business models, which can make them risky at times. So, one of the most important things I’ve learned is that focusing on companies that are built to last is the best way to drive great long-term outcomes, in my opinion. That’s what brought me to Polen Capital. I’m passionate about investing in long-term compounders. When I first encountered the firm back in 2017, I looked at the holdings for its flagship Polen Focus Growth strategy portfolio, and I saw several companies that I had covered back when they were small-cap. And that’s what’s so exciting about what we do – we try to find these great businesses with all the conditions in place for long-term compounding.

Q: At Polen, you’re also a co-chair of the Women Inspiring Success and Engagement (WISE) employee resource group at Polen Capital. Could you tell us about that?
I feel lucky to co-chair WISE with Taneka Lawrence. Like the rest of the employees at Polen Capital, she and I are both passionate about bringing more diversity into this field. Having been in an investment seat for so long, I’m a little frustrated that there hasn’t been more progress in bringing more women and other underrepresented groups into research and portfolio management. At WISE, we’re working to build a strong community of women to help them on their journeys, which can be different from men’s. We seek to provide the right support for the great women we hire at Polen Capital and even extend our mission beyond the walls of our company – helping young women with financial literacy and getting more women comfortable with and excited about investing.

Q: Please explain Polen Capital’s investment philosophy and the different strategies you run.
For our equity teams, the hallmark of our investment approach is a focus on high-quality growth companies. We own them in concentrated portfolios, and we have long holding periods. This approach is consistent with our mission to preserve and grow client assets to protect their present and enable their future.

Within the Small Company Growth team that I lead, we have four investment strategies: U.S. Small Company Growth, U.S. SMID Company Growth, International Small Company Growth, and Global SMID Company Growth. In each of these strategies, we own 25 to 35 of what we believe are the best small- and mid-sized companies that we can find. Based on our research, they are all companies playing an infinite game, have the potential to compound earnings and cash flow for at least five years, and are also what we call sustainable growers. We think they have the resiliency to sustain themselves in any environment because of their long-term behaviors, cash flow generation, and conservative balance sheet management.

Q: We’ve seen a volatile market this year, and growth stocks are under pressure. At times when there is some short-term underperformance, many of your favorite company names are probably on sale. With that in mind, are you making any changes to the portfolio?
In an environment like this, we seek to upgrade the portfolio. As I see it, even though there is a lot of pain in the market today – and I feel it personally, as I’m invested in our strategies too – the good news is that our opportunity set is growing. I believe this market correction sets the stage for a recovery, especially for the kinds of companies that we focus on. They have attractive secular tailwinds and robust business models, which we believe remain in place even amidst this kind of market disruption.

Q: What kind of advice would you give to investors who might be feeling nervous about being able to reach their long-term goals?
The most important thing that any of us can do is stay focused on the long term. It’s so easy to lose emotional discipline during a time like this. And that’s often why investors, even professionals, can make bad decisions because of all these emotional triggers. In my view, the best thing investors can do is stay focused on companies that can endure the obstacles we’re facing today – whether that’s COVID, supply-chain challenges, inflation, or rising rates. While no business is impervious to all these challenges, we believe the companies with the right long-term behaviors and financial flexibility are well-positioned to navigate these situations.

Q: What qualities do you look for in research analysts and portfolio managers?
For us, we’re trying to find people at the intersection of culture, cognitive flexibility, and skill. What does a culture fit look like at Polen? We’re looking for a team-first mindset, a growth mindset, a lot of humility, and a high level of curiosity. We’re doing research as a team, with three or four people working on a single idea together. We also want people with a passion for high-quality growth companies, who have patience, self-control, and self-awareness that considers biases and potential blind spots. We’ve found people with these traits can stay focused on the long term and won’t get caught up in the noise of the short term.

Important Disclosures
Please note that this document is a condensed summary of the full interview conducted by Orion’s The Weighing Machine. There is no guarantee that the investments selected will perform as expected. Some holdings may lose value.

This information is provided for illustrative purposes only. Opinions and views expressed are as of the date of this podcast and may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.