Blue Whale Update: A blank piece of paper

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 2020 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.

The investment process at Blue Whale has always been guided by a simple mantra – we are committed to delivering significant outperformance for our investors.

In order to do this, we have always needed to operate differently to other asset managers. Whilst many managers restrict themselves with certain investment styles, geographies, or sectors, at Blue Whale we want to be free to explore the best opportunities of the moment.

On the first day we sat down as analysts at Blue Whale we started with a blank sheet of paper. We looked for companies that had both a great business model and offered fantastic growth potential. The growth potential generally came in the shape of, what we believed to be, great company strategy and structural tailwinds to both the company and the sector it sat in. We then aimed to buy these high-quality businesses at an attractive price.

The first four years played out in much the way we had hoped – the key theme of digital transformation delivering much of the performance in these early years. But we cannot claim to have foreseen the global pandemic or the Russian invasion of the Ukraine, and what would fundamentally change in the world as a consequence.

Satya Nadella of Microsoft is quoted as saying during the pandemic they saw “two years of digital transformation in two months”. This was undoubtedly beneficial for companies in their digitization journey, and therefore beneficial for investors. However, for many companies, this also closed the gap between where the share price looked to offer good value, to starting to look like fair value – therefore losing their ability to deliver outperformance for investors.

Towards the end of last year, we saw an inflection point for the fund. We started reducing positions, or exiting stocks that didn’t offer the upside they once had, and in some cases faced serious headwinds in the form of inflation and unsettled geopolitics. Among those companies to lose their place in the portfolio were Amazon, PayPal, Facebook, and Alphabet – the fund now holds none of the famous FAANGs, once the darlings of every “growth” investor.

Whilst we would consider many of these companies to still be high quality businesses, due to where they are positioned, they lack the potential upside we are looking for to achieve the outperformance for our investors. A good example here is Alphabet, parent company of Google. When we initiated our position in Alphabet five years ago, the split between digital and traditional advertising was roughly one third digital to two thirds traditional. This obviously spelled enormous upside for digital advertising. As we sit today, the ratio has been reversed – two thirds of advertising is now in the digital realm. In other words, its penetration into the market has doubled in five years – this structural change mathematically cannot happen again. So, whilst digital advertising and Google might take a greater share of the pie, growth from here is going to be harder.

But we are happy that many of the companies that sat in our fund a year ago still offer fantastic upside for investors. Many of these companies have been hit hard in the last year, but we feel the fundamentals are still intact, and in many cases have improved. As the future of the global economic landscape becomes clearer, we anticipate these companies will perform well – the likes of Microsoft and Nvidia are prime examples.

We do not believe that the growth sectors of the last five years are necessarily the growth sectors for the next five. And where sectors do still offer opportunity, the pool has shrunk considerably. To deliver outperformance over the long term, you cannot rely on the same sector and same company to deliver year after year. It is important to keep your research broad, and your mind open to when a favoured company could see a stagnating share price.

If we look at the broad “tech” sector, for example, there is a far smaller pool of opportunities than before. This is in part due to digitization having forged on apace during the pandemic, but it is also necessary to consider the subsector to which the “tech company” belongs. Those that are most exposed to consumer discretionary spending, for example, face headwinds in the form of inflation and rising energy prices – it is therefore our belief that Amazon will not replicate its growth of the last five years again in the next five.

Accordingly, we now take out a new blank sheet of paper every day, ensuring our portfolio is constantly positioned in the best opportunities of the moment.

Looking forward, if we were to characterize a business that we are interested in, it is one which we believe will take a greater share of global GDP over the next five years. Sectors we would not have considered before – mainly due to there not being the structural drivers behind performance – are now looking far more attractive. Sectors such as energy, infrastructure, agriculture, and certain industrials. We are expanding our research into these sectors, trying to seek out where the quality lies. But we are happy to ignore these sectors entirely if an investment means lowering the bar of the high standards we set for quality in the portfolio. As our research into these new areas progresses, we will update you further. But the main thing has not changed – we still aim to buy the highest quality businesses at an attractive price, with the express aim of delivering significant outperformance for our investors.

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


Blue Whale Key Risks & Disclaimers:

The Blue Whale Growth Fund was launched in September 2020. All references to actions before this date relate to the LF Blue Whale Growth Fund.  Information on the LF Blue Whale Growth Fund is provided for comparison purposes only; it is a UK UCITS which is not registered for sale in nor is it promoted to investors in the EEA.  Whilst the investment objectives and charges are not identical, both funds are run on the same investment process.

Please note that the information provided in this article is not to be construed as advice and any views we express on holdings do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk. Past performance is not a guide to future performance.Blue Whale Capital LLP is authorised and regulated by the UK Financial Conduct Authority.

There are significant risks associated with investment in the Fund referred to herein. Investment in the Fund is intended for investors who understand and can accept the risks associated with such an investment including potentially a substantial or complete loss of their investment.

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and the value of your investment may be volatile and be subject to sudden and substantial falls.

Investment in a Fund with exposure to emerging markets involves risk factors and special considerations which may not be typically associated with investing in more developed markets. Political or economic change and instability may be more likely to occur and have a greater effect on the economies and markets of emerging countries. Adverse government policies, taxation, restrictions on foreign investment and on currency convertibility and repatriation, currency fluctuations and other developments in the laws and regulations of emerging countries in which investment may be made, including expropriation, nationalisation or other confiscation could result in loss to the Fund.

Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Fund charges may be applied in whole or part to capital, which may result in capital erosion. The Authorised Corporate Director may apply a dilution adjustment as detailed in the Prospectus. The Fund is not traded on an exchange or recognised market.

The foregoing list of risk factors is not complete, and reference should be made to the Fund’s Prospectus, KIID and application form.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Blue Whale Growth Fund. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.


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