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Blue Whale Update: Response to COVID-19

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.

Stephen shared his views in a short article and video below:

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.

You may view the video below:

LF 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 opinions, data, and analyses presented herein is issued for information only by Blue Whale Capital LLP (“Blue Whale”) which is a limited liability partnership incorporated in England and Wales under number OC414255. Blue Whale is authorised and regulated by the Financial Conduct Authority (“FCA”).

The contents presented herein are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness and, Blue Whale, its members, officers and employees do not accept any liability or responsibility in respect of the information or any views expressed herein. All data is sourced from Blue Whale unless otherwise stated.

The contents herein may include or may refer to documents that include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. The views we express on holdings do not constitute Investment Recommendations and must not be viewed as such.

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 Capital LLP. 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 and may be deducted from the invested amount therefore lowering the size of your 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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