Blue Whale Growth : February 2023 fund update

• Stephen Yiu has managed this fund since launch in September 2017
• Yiu leads an investment team of five in hunting for high quality companies with plenty of growth potential
• The fund has performed better than its IA Global peer group sector average since launch
• This fund does not feature on our Wealth Shortllist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

LF Blue Whale Growth aims to grow investors’ money over a five year period by investing in companies from around the world. As the fund’s name suggests, companies focused on growth are the primary focus, many of which reside in developed markets like the US and Europe. Whilst the managers have the flexibility to invest in higher-risk emerging markets, they tend not to invest much there, which means it could work well alongside other investments dedicated to these regions. Alternatively, it may complement portfolios focused on more value orientated companies with recovery potential.

Blue Whale was co-founded by Peter Hargreaves, a significant shareholder and founder of Hargreaves Lansdown Plc, which prohibits the fund from inclusion in the Wealth Shortlist.

Manager

Stephen Yiu has been lead manager of the fund since launch in September 2017. His career began in the Investment team at Hargreaves Lansdown. Since his departure in 2007, Yiu has added the likes of Artemis, New Star (now Janus Henderson) and Nevsky Capital to his CV. Yiu is supported by co-manager Dan Allcock and three dedicated analysts.

Yiu has gradually added more resource, and now leads an investment team of five including co-managers Dan Allcock and Matt Stonebridge. Alongside his fund management responsibilities, Yiu is chief investment officer of Blue Whale Capital, the company he co-founded in 2016 with Peter Hargreaves. We consider this role to be complementary to his fund management responsibilities and not a distraction from stock selection. If the company launches new investment products in the future, we believe it would need additional resources to do so effectively.

Process

Yiu and his team conduct detailed analysis to uncover companies they believe are of the highest quality. Each analyst can look at any sector and the team spend a large amount of time combing through company data and keeping a close eye on the competition. They look for companies with strong balance sheets, significant growth potential and robust business models that are resilient to the threat of disruption and fluctuations in the wider economy. They also favour experienced management teams whose interests are well-aligned with their companies’ prospects.

Once a potential candidate for investment has been identified, the team constructs a unique financial model to assess its valuation. Their forecasts are then sense checked against what other analysts in the market are predicting. This usually provides a good indication of how expensive or cheap a company’s share price is.

These strict criteria filter their benchmark of over 1,600 companies down to an investable universe of around 100. Currently they invest in 27. This gives each holding the potential to make a big difference to the fund’s performance, but it’s a higher-risk approach. Over 65% of the fund is invested in North America with the remainder largely invested in Europe and just over 3% invested in Asia. Companies in the technology sector account for around 45% of the portfolio but this includes a diverse array of businesses, including payments companies Visa and Mastercard and largest position ASML.

Yiu made some changes to the fund’s holdings over the last year. One of these changes was the sale of the fund’s position in Alphabet, the parent company of Google, after seeing better opportunities with more upside potential elsewhere. This was the last of the regularly referenced ‘FAANG’ group of companies to be sold from the portfolio.

Culture

Blue Whale Capital is a small boutique asset manager, currently running just the one fund. Its investment team has a fairly flat structure which means each member can propose ideas and voice their opinions in an open and collegiate environment.

As well as the five investment professionals, the company benefits from two senior advisers, Mark Skinner and Jeremy Leadson who between them have around 60 years’ experience in financial services. Co-founder Peter Hargreaves holds the position of chairman. Additionally, there is a chief compliance and risk officer. This is a small team, but it should expand as the firm grows.

ESG Integration

The firm integrates ESG (Environmental, Social and Governance) considerations into its stock selection process. The manager sees ESG as a risk factor, and he considers how ESG is likely to impact the performance of the companies he invests in. His high-quality investment approach means the fund won’t invest in companies generally perceived to be doing the most harm to the environment, such as coal producers. Similarly, he avoids investing in industries with poor labour relations, excluding many rideshare or ‘gig economy’ companies.

When it comes to voting, the manager will generally vote with management unless he believes doing so is against investors’ interests. He also engages with the companies he invests in, but the engagement process is not as systematic as that implemented by some other managers. The firm does not produce any engagement or voting report (aside from a headline voting summary), making it much less transparent than most other mainstream fund houses.

Blue Whale Capital is one of very few mainstream fund management companies that haven't signed up to the UN-backed Principles for Responsible Investment.

Cost

The LF Blue Whale Growth fund has an ongoing charge of 0.83% a year. The HL platform fee of up to 0.45% per annum also applies.

Performance

Since the fund launched in September 2017, Yiu has performed well and delivered stronger returns to investors than the IA Global peer group sector average. Over this period (to the end of January 2023) Blue Whale Growth has generated a return of 64.88%*, ahead of the 51.65% return generated by the peer group sector average. Past performance is not a guide to future returns.

The manager’s growth-focused investment style has been in favour for most of the fund’s existence, though it has been a headwind over the last year. Over the last 12 months the fund’s delivered a return of -11.72% to investors, lagging the IA Global peer group sector average return of 0.02%. Our analysis suggests that the fund’s investments in the technology sector, where it invests more than the index, have hurt performance over this period. As central banks, including the influential US Federal Reserve, have raised interest rates to combat high inflation, stocks priced largely on expected higher cashflows far into the future have fallen out of favour, sending their valuations downwards. Some of the fund’s holdings did perform well over the year though. Our analysis suggests its investments in Japanese based multinational business Nintendo and Semiconductor company ASML were among the better performers.

Though the fund has now passed its five year anniversary, it still has a fairly short track record so there is limited data to analyse and to consider how the fund might perform through a full market cycle. Investors should also bear in mind the meaningful weighting to the US and technology companies. Investors should build diversified portfolios with exposure to a variety of investment styles, sectors, countries and asset classes. Plus, you should regularly review your investments to make sure they continue to meet your needs and objectives.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2023

Find out more about Blue Whale Growth including charges

Blue Whale Growth Key Investor Information