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Blue Whale Update: The Great Tech Debate – A new world for investing

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.

One topic that often comes up in our conversations with investors is our exposure to technology. Given the significant outperformance from “Tech stocks” after lockdown, we think it would be helpful to visit this topic, clear up some misconceptions and share our views on the New World that’s emerging.

We start by addressing some misconceptions we often come across when people talk about the “Tech sector”.

Misconception 1: “Tech” is a special, homogenous 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.

Misconception 2: anything related to the “Tech sector” should do well

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.

Misconception 3: Tech outperformance today is just a repeat of the Tech Bubble from the 90s

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:

Why would you not want to be exposed to technology?

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?

Why do more investors not invest in technology?

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.

Investing in the New World – how Blue Whale views “Tech” 

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.

We are not a “Tech” 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.

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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