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LF Blue Whale Growth: November 2021 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Stephen Yiu has managed this fund since launch in September 2017
  • Supported by a team of four, he hunts for high quality companies with plenty of growth potential
  • Performance has been strong so far but Yiu’s track record is still relatively short
  • The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in 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 manager has the flexibility to invest in higher-risk emerging markets, they tend not to, which means it could work well alongside other investments dedicated to these regions. Alternatively, it may complement those 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.

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. The company may launch new investment products in the future, but only once it has the required resources to do so effectively.

Process

Blue Whale has set the bar high when it comes to performance expectations. Over the medium term the managers aim to return at least 5% more than their benchmark annually. Yiu believes there are two key factors to achieve this. Great stock picking and managing a highly concentrated portfolio. Whilst this approach allows each company to shine individually and make a big difference to performance, it is higher risk since each can also have a large negative impact on performance.

Yiu and his team conduct detailed analysis to uncover companies of the highest quality. Each analyst can look at any sector and spends a large amount of time combing through company data and keeping a close eye on the competition. Ideal candidates have a strong balance sheet, significant growth potential and a robust business model that is 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 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 30. Over 70% of the fund is invested in North America with the remainder split across Europe and Asia. Technology accounts for over half the portfolio but this includes a diverse array of businesses, including payments companies Visa and Mastercard, which Yiu views more as financial companies than software firms. Looking at the portfolio through this lens, technology accounts for closer to 20% (to the end of July 2021).

New investments over the past 12 months include US technology company Nvidia which has quickly become one of the fund’s largest investments. Yiu believes its market leading processors will benefit from growing trends like 5G, artificial intelligence and augmented reality. Earlier this year Japanese gaming company Nintendo was also added to the fund. Yiu believes the firm’s current console line up will continue to keep it relevant. Other additions include healthcare company Sartorius and technology focused firm Atlassian.

In contrast, Yiu sold an investment in software company Salesforce due to unfavourable changes in the management team’s strategy. Rather than letting the company grow naturally, they have been acquiring companies and entering new markets which Yiu thinks will be difficult to compete in.

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.

The firm integrates ESG (Environmental, Social and Governance) considerations into its stock selection process and does not invest in industries where environmental concerns could prevent a company sustainably growing revenues or profits, such as coal mining.

Cost

The LF Blue Whale Growth fund has an ongoing charge of 0.87% a year. This is in line with the average fund in the IA Global sector. The HL platform fee of up to 0.45% per annum also applies.

Performance

Yiu has delivered impressive returns since the fund launched in September 2017. Over this period the fund returned 113.06%* vs 59.36% for the IA Global sector. Our analysis suggests this is through a combination of the manager’s stock picking ability and his growth-focused investment style. As always, past performance is not a guide to future returns and there will be times the fund falls in value, so you could get back less than you invest.

Over the past 12 months the fund’s returned 27.50% which is marginally behind the peer group return of 28.47%. The investment in Nintendo has been one of the weakest performers. The company was expected to release a new console this year (Switch Pro) but instead opted to just upgrade its existing product (Switch OLED). Looking forward, Yiu believes the company remains attractive, especially from a valuation perspective.

The fund 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. That said, since launch Yiu’s focus on high quality companies has served him well. So far, the fund has outperformed in both rising and falling markets, including during the onset of the pandemic in March 2020. There are no guarantees the fund will perform this way in future though.

The manager’s growth-focused investment style has been a tailwind for performance over recent years but it’s important to remember this may not always be the case. Investors should also bear in mind the meaningful weighting to the US and technology companies. Whilst these have benefited performance so far, the fund could struggle in an environment where these are not in vogue. That’s why we suggest 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.

Annual percentage growth
Oct 16 -
Oct 17
Oct 17 -
Oct 18
Oct 18 -
Oct 19
Oct 19 -
Oct 20
Oct 20 -
Oct 21
Blue Whale Growth N/A** 9.68 18.57 22.42 27.50
IA Global 14.02 1.11 11.18 7.28 28.47

Past performance is not a guide to the future. Source: *Lipper IM to 31/10/2021.

**Data covering this period is unavailable. Fund launched in September 2017.

Find out more about the Blue Whale Growth, including charges

Blue Whale Growth Key investor information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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