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Blue Whale Update: Transcendent Companies



 

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.

In a world shaped by uncertainty, our dedication to the high-conviction approach we adopt for our flagship strategy, the Blue Whale Growth Fund, remains resolute. Through meticulous research and stringent investment criteria, we continue to place ourselves in an ideal position to achieve consistent, significant outperformance versus the market. However, past performance does not dictate future outcomes and our prospective investors must comprehend our investment philosophy and strategies for driving future performance.

Our investment philosophy centres on buying high-quality businesses at attractive valuations. Although most investors want to buy into high-quality businesses, the metrics used to determine those businesses vary drastically. Looking at commonly used valuation metrics in isolation can often lead to a false conclusion, so we think it best to get a deep understanding of a business to derive its “quality”. This “quality”, distilled into a single sentence, embodies a business’s ability to transcend the macroeconomic environment and deliver share price growth based on its strong fundamentals.

Finding transcendent businesses

Finding these businesses is relatively simple in theory. Once we have established a company that has strong fundamentals through our proprietary research, we look to see if that business can leverage a global trend. Often described as mega-trends, they tend to use technology to drive a fundamental change in the global economy. Examples in the past have been the industrial revolution and the rise of the internet. Digitalisation continues to be a global mega-trend, and many think the next mega-trend is automation and artificial intelligence.

To drive outsized returns regardless of the economic environment and to find these “transcendent companies”, we look for those businesses that can leverage these mega-trends and invest in them at an early enough stage so that we benefit from their upside potential.

Here, Nvidia is a great example. We initiated our position in Nvidia in 2021 having established the business as having strong fundamentals and noticing that it was a key beneficiary of the “AI revolution” due to its production of the world’s best high-powered processing chips. In early 2022, as valuations were reset on high interest rate expectations, the stock fell back considerably. As the share price fell, we continued to invest more into the business as its valuation became even more attractive. But whilst macro-economic indicators continued to deteriorate in the second half of 2022 (interest rates continued to rise predicting a tougher environment for equities), Nvidia bounced back strongly. Since we initiated our position, when the company stood at around $500 billion, the company’s market capitalisation has gone up more than 4x to make it the world’s third largest business and worth around $2 trillion (as at 29/02/24).

Thanks to its strong fundamentals and its importance in providing key hi-tech components for artificial intelligence, Nvidia was able to transcend the macroeconomic indicators that could have weighed on its share price. Even when considering the initial fall in 2022, the share price was able to triple from its 2021 peak whilst economic indicators worsened.

Opportunity from uncertainty

Whilst we do not base our investments on the state of the global economy, we do consider the macro environment to make sure that any potential risk factors are considered when investing in a particular company. In some cases, we can not only determine what the macro environment would preclude us from investing in, but we can derive opportunity from uncertainty as well.

A good example here is looking at the geo-political uncertainty in the Asia-Pacific region. For some time now the West has been wary of China, particularly with regards to its perceived ambitions in the South China Sea. Presently the World relies on a single company in Taiwan to produce the global supply of high-end semi-conductors. The West has noticed the potential for this to have huge repercussions should tensions escalate between China and the West. As the West looks to diversify production of this key electronic component away from Taiwan (with $300-$400 billion committed investment), we believe there are a handful of clear winners in companies such as Lam Research and Applied Materials who make the equipment new foundries will require to develop these components. Both companies feature in the portfolio.

Amidst the global economic uncertainty and heightened geopolitical tensions, our role as investment managers is to filter out the noise and find pockets of opportunity in those businesses that can transcend the challenging backdrop. Especially as high-quality businesses have become scarcer in the current regime. Nonetheless, anchored by our steadfast approach and commitment to invest in only 25-35 companies benefitting from global trends and strong fundamentals, we feel confident in our portfolio’s ability to continue to deliver outperformance for our investors going forward.

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.


MeDirect Disclaimers:

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.

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