|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.
This month we are celebrating 6 years of the LF Blue Whale Growth Fund. I would like to take this opportunity to thank you for your support through these early years of Blue Whale. It takes no small amount of bravery to back a new fund, especially one set up by an entirely new company. We are determined to reward you for your support, committing ourselves in our mission to deliver significant outperformance for our investors.
On each anniversary we like to look back over the lifespan of Blue Whale and explain how that journey has impacted where the Fund sits today.
In September 2017, the portfolio was designed with a simple mantra – invest in high quality businesses at attractive prices. Prior to launching the Fund, we had committed to extensive research into possible investee companies, with our investment team doing proprietary research.
Six years of upheaval
The Fund was established in the midst of the United Kingdom’s negotiations to leave the European Union and with a newly elected and divisive President in Donald Trump. Quickly, other problems became evident – a developing US/China trade war, questionable monetary policy in the US, a global pandemic and a war in Ukraine to name but a few. Political upheaval both in the UK and abroad has been a feature of the past six years; the Fund having seen four Prime Ministers and one of the most acrimonious Presidential elections in history. The political landscape in the US only becomes more divided.
In late 2021/early 2022 the combination of all these elements led to a massive correction in the stock market, with prices down across the board – energy being the only positive sector during this period.
Given that our first four years to September 2021 saw no shortage of potential pitfalls for investors, we were pleased to have delivered a return of 114%* (from 11/09/17 – 31/08/21), vs the IA Global Sector of just 55%, thereby more than doubling our benchmark’s performance. Investors should note that no references to past performance in this review should be seen as a guide to future performance.
Portfolio change and adaptation
Delivering this level of performance was not easy – we kept a constant eye on our portfolio companies and made changes where we saw fit, be that due to valuation, global trends, or structural changes to their businesses.
The overarching theme that drove returns through the first few years was that of digital transformation. And whilst we actively managed our holdings, we remained loyal to this key theme.
But in mid-late 2021 we felt more radical changes to the portfolio were necessary. Seeing the inflationary environment driven by the world’s response to Covid-19 and evidence that many structural changes in the world of digital transformation had accelerated during the pandemic, we saw a lack of upside potential in many of our once favoured companies. This prompted a move to sell a number of holdings, with companies such as our FAANG holdings dropping out of the portfolio altogether. This proved to be a shrewd call, considering the rapid sell-off in these businesses that commenced in the early months of 2022. However, selling these companies did not protect us sufficiently against the contagion of the share price downgrades in the “tech” sector. We continued to hold big tech names such as Microsoft and Nvidia through this volatile period in the belief that their businesses would weather the storm due to their superior quality; we were mistaken.
We are pleased to report that the quality eventually shone through for these businesses as Microsoft and Nvidia have both since exceeded their pre-sell-off highs – Nvidia is up more than 200% this year alone.
Reacting to the developing structural shifts in the global economy – notably inflation and higher interest rates – we looked to new sectors for Blue Whale to deliver growth potential. Our research extended to railways, energy companies and select financials to see if we could derive the level of quality we require in sectors that we see as beneficiaries of the post-pandemic, post-Ukraine invasion world.
Six months of poor performance
Despite our best efforts, the portfolio suffered six months of poor performance at the start of 2022.
Growth-orientated businesses sold off in their droves, in favour of “value” propositions that were considered a “safe haven” given the uncertain economic backdrop. It should be noted, however, that these value propositions were still not positive performers, instead showing more modest losses compared to their growth-orientated counterparts.
Lessons were learned during this period and the experience of such a sell-off has strengthened our investment team.
A surprisingly good year
Halfway through 2022 the sell-off tapered, but the damage had been done. Geopolitical tensions around Russia’s invasion of Ukraine and Chinese sabre rattling meant investors adopted a “wait and see” approach to re-entering the stock market. In addition, interest rate rises now meant investors had a safer alternative when it came to asset allocation, with money market investments offering the most attractive returns for nearly 20 years.
Despite this, however, the appetite for investment gradually picked up in the latter half of 2022 and continued apace in 2023. Whilst the news remained bleak, investors were keen to seek out those pockets of opportunity where they could hopefully derive a better return for their capital given cash deposits were now being eroded at the fastest rate for over 40 years.
The bad news peddled by the press would have had you believe opportunity for investors continued to look stark, but from the end of June 2022 to end of August of this year, the Fund* delivered performance of 25.6% vs the IA Global average of 11.1%.
2023 and beyond
Despite an incredibly tough six years, we are pleased to report our investment mantra has not changed – we continue to invest in high quality businesses at attractive prices. Our commitment to an extremely well-resourced investment team continues with six analysts and counting.
Whilst the general thesis behind what makes a great investment for the portfolio remains the same, the process to identify these companies has evolved. Our increased coverage through investment in our analysts helps us to find exciting new businesses in a variety of sectors which we hope will drive outperformance in the portfolio.
Growth in 2023 has been driven largely by the AI (Artificial Intelligence) revolution. As businesses across the board adopt this game-changing technology, we believe this area has the potential to continue to drive growth over the medium to long term.
Other themes in the Fund look to stabilise the portfolio against possible volatility from continued geopolitical tensions and inflation and interest rate concerns. Our investment into railways and our backing of payment systems have provided resilience in those months where unwelcome news and monetary policy updates have caused dips in the market.
It is true the Fund has yet to reach its post-sell-off highs, but the trajectory for recovery remains positive.
Matching ourselves against our competitors in the IA Global sector drives our competitive nature. Outperformance is and will always be our key marker for success in the Fund – indeed “significant outperformance” is what we strive to achieve.
To that end, in spite of a tough period at the start of 2022, we are pleased to report the Fund has delivered, what we believe to be, five and a half years of pleasing returns. From inception in September 2017 to the end of August 2023, we have delivered a return of 90.5%*, vs the IA Global average of 54.6% – an outperformance of 35.9%.
The world is constantly changing. Our dynamic, research-led approach should give us scope to continue to drive outperformance for the Fund. Most pleasing for me, as manager of the LF Blue Whale Growth Fund, is to see a team around me hungrier and more dedicated than ever before. We welcome the challenges of the next six years and hopefully many more after that.
*LF Blue Whale Growth Fund I Acc
Please note that references to the LF Blue Whale Growth Fund in the article are provided for information purposes only; it is a UK UCITS which is not registered for sale in, nor promoted, to investors in the EEA. The Blue Whale Investment Funds ICAV Blue Whale Growth Fund was launched in September 2020 and is available to MeDirect clients. Whilst the investment objectives and charges are not identical, both funds are run on the same investment process.
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.
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.