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.

“We are living in unprecedented times” was the buzz-phrase for 2020 and much of 2021. However, I think many of us are now starting to feel that things are feeling quite “precedented”. This explains the truth of the adage “The only certainty is uncertainty”.

Positioning ourselves to ride out uncertainty in the market is very straight forward in theory – buy high quality businesses, buy them at a great price, have a strict valuation discipline. 2021 has once again proved this to be a sensible strategy. The fund delivered performance of 27.7% (Blue Whale Growth Fund T EUR Class). Whilst outperformance is always pleasing, the end of the year saw much of our outperformance eroded as the shine came off the markets following a global surge in Covid cases.

Selected best performers in the fund were Microsoft (benefitting from working from home), Intuit (using its accounting and tax-filing technology to cut out the requirement for expensive face-to-face accountancy meetings), Atlassian (offering the best software developers’ collaborative working tools), and Alphabet (expanding its footprint as the largest holder of digital real-estate).

Our biggest disappointment in the portfolio was Nintendo. A global shortage of microchips led to a delay in the launch of the Nintendo Switch Pro, leaving consumers underwhelmed with a mediocre Switch upgrade instead. In turn, the share price performance was disappointing, however, we believe the investment rationale remains valid.

One area in which we see ourselves as differing from many managers is that we are willing to make significant changes in the portfolio in search of outperformance. Much of our time is committed to researching those companies that sit within our own prescribed investable universe of around 100 stocks. However, we also give considerable time to idea generation – finding new investment ideas from around the globe. Accordingly, new additions to the portfolio this year were Nvidia, ASML, Kering and Sartorius. Making way were Unilever and Moncler.

Amazon was also a surprise make-weight in the portfolio owing to increased concern over its retail business, and the potential impact of inflation on the retail-arm’s costs, and also concerns over AWS (Amazon’s cloud computing arm) market share when compared to Microsoft and Alphabet.

Whilst we are a “bottom-up” fund – designing our portfolio based on company fundamentals – we pay close attention to the macro environment. In particular, the spectre of inflation led to much scrutiny of our holdings in the year. We are pleased to report the portfolio held (and continues to hold) a variety of companies in differing sectors that offered, what we believe to be, an inflation-busting duo – superior pricing power and high gross margin. We wrote more about this in our article “Covflation – The opportunities for investors in this unique inflationary environment”.

For the fund, 2021 was the first full calendar year, since launch in September 2020. Pleasingly, assets under management more than doubled over the period, demonstrating investors’ belief in our process and performance.

Our truly active approach to managing the Blue Whale Growth Fund means we can adapt to the world as it changes. Our robust process continues to evolve, but is based on two key elements:

1. We continue to invest in high quality companies: the ability of companies to exhibit fundamental outperformance is constantly in flux and our team of investment professionals will continue to chart these changes.

2. We maintain a strict valuation discipline: the market is a dynamic beast and prices often diverge from what we see in the fundamentals – but we will never invest into low quality companies (or businesses) that may be at the mercy of cyclical economic gravity.

Looking forward, we are excited about 2022. The portfolio is positioned to take advantage of what we see as the key issues of the year to come – continued digital transformation, 5G rollout and a global economy cautiously emerging from pandemic. We are also mindful of possible pitfalls over the next year – chief amongst them being inflation – and we have attempted to position the portfolio to defend against these pitfalls accordingly.

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.