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.
We start by addressing some misconceptions we often come across when people talk about the “Tech sector”.
This could hardly be further from the truth – the technology sector is in fact the most diverse and dynamic group of companies in terms of business models and the end markets served. Furthermore, the use of technology no more turns a company into a “Tech” business than a company using electricity makes it an “electric” one – it simply indicates good business sense.
A number of our Top 10 holdings are classified as “Tech” but they range from payments companies like Visa and Mastercard, which serve banks, to software companies like Adobe and Autodesk, which serve the creative and construction industries.
Tech businesses do not automatically generate good returns: they must earn it.
The software companies in our portfolio have certainly earned it – they’ve been able to grow revenues and margins and some, like Microsoft, have even seen a positive outcome from COVID-19 and lockdown. On the other hand, there are plenty of household tech names that have not done as well: IBM, Oracle and Hewlett Packard to name a few.
Due to the diversity in business quality, successful stock picking adds significant value within the “Tech” sector.
At Blue Whale, we are firm believers in learning the lessons from history but calling the present day a Tech Bubble is taking the wrong leaf out of the history book.
As the economist Carlota Perez has shown, there is an adoption curve to all new technologies and the correct historical parallel to point to is in fact the discovery of electricity. Just as the use of electricity became widespread across all industries over time – in manufacturing, consumer products, professional services – so are new internet-based technologies like cloud computing and digital payments, which have matured into enterprise-grade tools to help businesses with digital transformation.
Another way to look at this topic is to ask the question:
This gets to the core of our investment philosophy: If you’re looking for high quality companies that can sustainably grow earnings, would you prefer to be invested in innovative companies building new markets and taking share, or would you prefer to back incumbent stalwarts running on stone age systems?
Some investors actually prefer the latter.
Many of these investors hold reservations about investing in “Tech” because they carry baggage from the days of the Internet Tech Bubble in the 90s. Some of these investors survived by avoiding “Tech” altogether and so have subsequently sworn off investing in anything that resembles “Tech”.
However, the “Tech” that now dominates the market is very different to what was there in the 90s and early 00s. When the internet was in its infancy, many “Tech” companies had no cashflows in their business models and had no customers.
Others justify avoiding “Tech” by deferring to Warren Buffett’s line that it lies outside their “Circle of Competence”. Unfortunately, missing out on sector returns due to a lack of expertise is a fairly poor excuse, and is something investors should be wary of. Buffett is an interesting example having displayed a strong desire over more than four decades to expand his investment acumen from cotton mills to auto insurance, he has baulked at expanding it into Tech. He was only willing to develop his Circle of Competence so far. We believe that any serious investor must be open to develop their expertise in all sectors, however difficult that may be.
At Blue Whale, our aim is to deliver consistent significant outperformance for our investors. This is why our investment team took the time to study new technologies to understand their impact on companies’ ability to sustain revenue growth and margin expansion over the longer term.
What we see now is a generational shift in the more widespread adoption of digital infrastructure that’s been thirty years in the making. This is a New World defined by Cloud-based architecture, digital payment technology, and AI-enabled automation and these are the technologies that underpin the digital transformations that many companies are undergoing.
For us, the adoption of New World technologies speaks to a company’s ability to adapt to changing times. These technologies enable new business models like SaaS and the app economy to flourish, transforming diverse industries from retail to advertising to manufacturing.
The winners in this New World are the users, producers and distributors of the specific technologies listed above which help them grow their respective markets and win market share. These are the companies we are picking for the Blue Whale Growth Fund.
Three years ago, when we started with a blank piece of paper, our exposure to “Tech” was half of today’s level. We have since found the highest quality businesses among the pioneers of digital transformation. As stewards of our investors’ savings and pensions, we look for the best investment opportunities across all sectors and geographies.
Our current exposure to technology simply reflects our view of where the best opportunities exist now for consistent significant outperformance (please see chart below). We are free to move in and out of sectors should greater opportunities arise elsewhere. If the shine comes off technology (perhaps when valuations are no longer attractive) we will reposition the portfolio – as any prudent fund manager would – with the aim of ensuring we continue to invest your money in the right place and at the right time.
LF Blue Whale Growth Fund is manufactured by Blue Whale Capital LLP and represented in Malta by MeDirect Bank (Malta) plc.
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