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Blue Whale Growth Fund targets number one slot

Backed by the billionaire founder of Hargreaves Lansdown, this open-ended fund has come a long way in a short space of time

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“The philosophy is quite straightforward; we invest into high-quality businesses at attractive prices,” says Stephen Yiu, chief investment officer of Blue Whale Capital.

That superficially simple approach has paid off in spades for Yiu and the Blue Whale Growth Fund he heads, which finds itself in exalted company.

Its performance since inception two-and-a-half years ago, when it was set up with seed funding from Hargreaves Lansdown billionaire Peter Hargreaves, has been nothing short of phenomenal.

In that time, it has shot up the rankings and is one of a market-leading trio made of Terry Smith’s Fundsmith and Michael Lindsell and Nick Train’s Lindsell Train, delivering a 55% return since inception.

Exponential growth 

With funds under management of around £265mln, Blue Whale is very much a featherweight wedged between two super-heavyweights.

However, Yiu’s ambition is undimmed – he wants to be the undisputed number one as he builds the business to one with “multi-billions” under its control.

Like many successful investors Yiu is self-effacing and tends not so much to denigrate Blue Whale’s achievements, but underplay them, presumably in a bid to fly under the radar.

Unfortunately, success brings with it recognition.

And while the formula for that success seems superficially pragmatic and anodyne, the framework and discipline required to outperform the market should not be under-estimated.

With a team of five people managing a relatively modest pot, Blue Whale is a little over-staffed compared with the average traditional actively managed fund where a firm lid is kept on costs.

Fundamental research

But having such a team allows the growth fund to carry out its own in-house fundamental research as it tries to identify the ‘alpha’ driving would-be investments.

This requires time-consuming model-building and deriving its own valuation metrics.

Yiu and the Blue Whale team, therefore, invest in:

•          High-quality large and mega-caps at an attractive price

•          They “like” companies with strong competitive positions and good management teams

•          Picks tend to be exposed to “structural growth drivers” such as digital transformation

•          And these businesses will inevitably deliver a high return on invested capital

Yiu eschews broker research and appears to shudder when talking about the bygone method of banks offering fund managers investment ideas, even if a lot more transparency has been brought to the process post-MiFID II.

Where is the opportunity to outperform if all funds are privy to the same ideas, he asks? And the fund manager has a point.

So, original thinking is the order of the day.

Narrow focus

Though Yiu is not so naïve as to think he and his team can cover the waterfront.

So, there are around 100 stocks on Blue Whale’s ‘watch list’ and 25-35 at any one time make it into the portfolio.

As noted above, the investments tend to be in areas that are comparatively immune from the macro ebbs and flows – though as we have seen just recently even Apple, a tech phenomenon, isn’t impervious to the current coronavirus-inspired economic malaise.

That said, it’s unlikely Yiu would invest in Apple. Tech, yes. But tech that has the capacity to disrupt on a global level, where there are secular drivers.

Transformational technology 

So, that means Blue Whale is interested in digital technology such as PayPal and Adobe, med-tech, which should come into its own with the boomer generation in retirement, and luxury brands. This is what high quality looks like to Yiu.

Having provided us with the investment equivalent of the Colonel’s secret recipe, are there any hints or tips Yiu would give the engaged private investor?

Disarmingly frank, he admits the Blue Whale’s methodology is fairly straightforward, but it is time-consuming; a full-time job if one wants to be truly successful.

Even so, he proffers these pearls: keep your focus narrow to perhaps five stocks in any one actively managed portfolio and stick to what you know.

So, if you have expertise in the sector then play to your strengths because not everyone investing in that arena will have your insight.

Knowledge is strength

In other words, knowledge is strength and by his own admission, there are sectors that baffle Yiu (pharma) or require too much time to become expert.

“So, there’s a lot we don’t touch; where we can’t add value and we don’t pretend we know everything,” he says.

He points out that the small-cap arena offers those who are tuned into the eco-system the opportunity for stellar returns, but only if you do your own comprehensive research.

“I love people who do their own research in the private investor world,” he adds. “You need to be inquisitive if you want to be successful.”


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