Blue Whale Update: Where opportunity is seen after COVID

Stephen Yiu - Blue Whale Fund Manager Stephen Yiu is the Chief Investment Officer at Blue Whale Capital and Lead Manager of the Blue Whale Growth Fund.
Stephen co-founded Blue Whale Capital with Peter Hargreaves, co-founder of Hargreaves Lansdown, in 2016. The Blue Whale Growth Fund was launched in September 2017 and is a long-only global equity fund focusing on developed markets.
Stephen adopts a high conviction, active approach based on bottom-up, fundamental research.

When we launched the Blue Whale Growth Fund in 2017 – long before the notion that pandemics could become a material impediment to global growth – the investment team and I set out simply to find high quality companies which would contribute to consistent significant outperformance.

I am happy to report that during the March sell-off and the subsequent stock market rebound, our strategy has withstood its toughest test yet.

Looking ahead, we aim to continue investing in high quality businesses with a strict valuation discipline. Among these, we highlight two types of companies where we see opportunity:

Lockdown Survivors

With lockdown easing globally, many companies in industries that suffered under lockdown are embracing the current re-opening.

Among these are companies where foregone revenues during lockdown are lost forever – such as hotels and restaurants. In contrast to these, there are companies which were not immune to the effects of lockdown, with a slow-down in the sale of products and services, but whose demand is pent up with revenues being delayed, not lost.

Medical device companies, such as Boston Scientific, are an excellent example. Often, they are involved in procedures like cancer-related endoscopy, heart surgery or chronic illnesses, which, though classified as “elective”, are by no means optional. These are the companies we prefer in a recovery.

Beneficiaries of accelerated adoption

Many of the sectors we invest in benefit from strong and sustained secular growth, some of which have accelerated during lockdown.

Benefiting from changes in consumer habits are sectors like eCommerce and Payments, where COVID has been a catalyst for accelerated adoption of contactless and online payments – benefitting companies such as PayPal and VISA. Even considering the boost provided by COVID, these segments of the market still have a long runway of growth ahead of them.

Enterprise demand has also progressed, with recent experiences highlighting the increased need for digital transformation, be it for productivity software that better enables working from home (such as Adobe’s Creative Cloud) or the Cloud architecture that powers both the software and the ease of digital collaboration – Amazon’s AWS.

Of particular interest in this area is Microsoft, which not only offer their omnipresent digital Office – enabling the new obligatory trends and requirements for working-from-home – but also, their Azure cloud service powering and platforming other apps and services operating in this field.

Satya Nadella, CEO of Microsoft (a top 10 holding since launch) described in April seeing “two years’ worth of digital transformation happening in two months” among their enterprise customers. From our investment team’s research, we are still only at the beginning of a long, sustained journey in enterprise digital transformation.

In the above examples of where we see opportunity, we are identifying companies and sectors that we have appreciated for some time. Although the quality of a business does not change rapidly, stock markets can be capricious.

The danger, especially as our fund enjoys peer-beating performance, is to unquestioningly stick with the status quo, resting on our laurels, and failing to adapt to changing times.

We know we cannot afford to be complacent and will continue to exercise rigorous valuation discipline while honing our approach with a view to continuing to achieve our aim of delivering consistent significant outperformance.

LF Blue Whale Growth Fund is manufactured by Blue Whale Capital LLP and represented in Malta by MeDirect Bank (Malta) plc.

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