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Polen Capital: “We Still Believe that Alibaba (BABA) is a Great Business”

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  • BABA

Polen Capital, an investment management firm, published its “Polen Global Growth” third quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly gross return of -3.03% was delivered by the fund for the third quarter of 2021, versus the MSCI AllCountry World Index (the “Index”)'s return of -1.06% for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Polen Global Growth, in its Q3 2021 investor letter, mentioned Alibaba Group Holding Limited (NYSE: BABA) and discussed its stance on the firm. Alibaba Group Holding Limited is a Hangzhou, China-based e-commerce company with a $407.9 billion market capitalization. BABA delivered a -38.30% return since the beginning of the year, while its 12-month returns are down by -44.75%%. The stock closed at $161.58 per share on November 17, 2021.

Here is what Polen Global Growth has to say about Alibaba Group Holding Limited in its Q3 2021 investor letter:

"First, on managing risk. We have held positions in Alibaba since the inception of the Polen Global Growth Portfolio in 2015, and it has performed very well during that period. We invested via the variable interest entity (VIE) structure, given that it is the only channel for foreign capital to invest in the company. Investing in a VIE involves a contract for ownership in a business (that cannot be owned by non-Chinese investors), rather than direct equity ownership, as we have in all other businesses in the Portfolio. The Chinese government has never explicitly endorsed nor condemned the VIE structure, so a certain amount of risk remains.

From our point of view, China has always had the capability to appropriate businesses from foreign owners but had not demonstrated the will to do so. We felt that changed when the Chinese government enacted a series of regulatory policies that turned for-profit, after-school tutoring companies into non-profit entities. While a logical argument could be made that such actions are not likely to bleed over into China’s tech sector, we think increased regulation and the potential for government-directed capital allocation from these businesses could lead to lower-than expected earnings growth.

To be clear, we are not “making a call” on China. We believe that the risk of such draconian regulation of China’s tech sector is unlikely. That said, given our global opportunity set, we decided to reallocate capital into businesses likely to produce similar earnings growth over the next five years with a greater degree of certainty. We still believe that Alibaba is a great business and could be owners of one or both in the future, but we felt there were easier ways to achieve our objective at the present time."

Alibaba Group Holding Ltd (NYSE:BABA), sign on a building, logo, share, stock, New York, offering
Alibaba Group Holding Ltd (NYSE:BABA), sign on a building, logo, share, stock, New York, offering

Christopher Penler / Shutterstock.com

Based on our calculations, Alibaba Group Holding Limited (NYSE: BABA) ranks 8th in our list of the 30 Most Popular Stocks Among Hedge Funds. BABA was in 146 hedge fund portfolios at the end of the first half of 2021, compared to 135 funds in the previous quarter. Alibaba Group Holding Limited (NYSE: BABA) delivered a -10.56% return in the past 3 months.

Disclosure: None. This article is originally published at Insider Monkey.