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.
Blue Whale Growth Fund – COVID-19 update: how to come out on top
To say the last few weeks have been turbulent for investors is somewhat of an understatement. The uncertainty caused by the new reality of global pandemic has caused single-day declines in stock markets the likes of which have not been seen for over 30 years.
Below we discuss this sell-off, what it means for investors, and how the Blue Whale Growth Fund is positioned during this time of considerable uncertainty.
Our investment philosophy at Blue Whale has always been simple – buy great companies at attractive prices.
The last few weeks have been challenging for long-only investors. A general decline in the market is painful for investors to watch, but it has represented an extreme stress-test of our constituent investments and provided us with the opportunity to find value where previously it was harder to come by.
As investors de-risk, there is a tendency to take everything off the table all at once. However, this indiscriminate selling does mean great companies are sold off at a similar rate as their not-so-great counterparts. This is what we are seeing now with the outbreak of COVID-19.
In these testing times there are three elements to the Blue Whale Growth Fund and its constituent investments that should provide reassurance. The first and most important aspect is our investee companies’ ability to deploy cash. As cash generative businesses with strong balance sheets – essentially an emergency fund to weather the storm and a war chest to invest capital – they are in an ideal position to grow market share when their competitors are dialling back or going bust.
Secondly, we look at the nature of many of the businesses we hold and how their offering provides reassurance for investors during times of economic stress – for example, Unilever with their immense portfolio of consumer staples, Adobe with their subscription based creative design software, Microsoft with its ubiquitous work platform (Office 365), PayPal with its secure online wallet, and Amazon with their home delivery and on demand video services (among many others). Their business models and their products not only stand strong in the face of recession, they are especially relevant in this case due to their provision of cleaning and sanitary products (Unilever), assistance to those working from home (Adobe and Microsoft) and general services whilst we are trying to limit interpersonal contact (Amazon and PayPal).
Finally, we consider the Fund itself. Due to our strict valuation discipline, our cash position had crept up to around 10% at the beginning of February. The present market sell-off is making prices attractive again for many great companies and we are able now to deploy our cash and inflows at more advantageous levels.
As stock pickers, our aim is to invest in companies that can grow and compound sustainably over time. This means that we naturally avoid the likely casualties of a recession, including airlines, cruise lines, high-street retailers, banks, energy companies and highly levered companies. This latest round of economic malaise caused by COVID-19 will be particularly damaging to these specific industries.
Have we seen the worst of it? While we are not attempting to time the market, a key element of our process includes building our own financial models for each investee company, which helps us understand how they fare in a recession.
Prices may fall further, but it is undeniable to us that some companies with strong long-term growth prospects have reached very attractive valuations.
So where do we stand now? The Blue Whale Growth Fund has continued to outperform our peer group (the IA Global Sector Average) in 2020 to date. Since the sell-off started the Fund has also held up comparatively well. Although we have not been immune from indiscriminate selling, we believe the underlying strengths of the companies in our portfolio will allow them to survive the next recession and thrive beyond it.
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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.
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