Blue Whale Growth manager Stephen Yiu has changed tack and stocked up on more “defensive” names after losing 30% over the first six months of the year.
An H1 update confirmed Canadian National Railway and Union Pacific were added to the £790m global equity fund during the period, taking total holdings to 25.
Yiu (pictured left) explained the North American railroad operators offer a “defensive play given the uncertainty of inflation and spectre of recession” due to their high margins and strong cash generation and “a secular move toward repatriating supply chains”.
He also flagged the “interesting ESG angle”, with railroad transport being more sustainable and efficient than truck haulage and air delivery.
Losses hit 30% in H1 despite well-timed Meta and Paypal exits
The latest additions are a departure for Yiu, who has become known for his tech-heavy portfolio. Until recently, this had proved a winning strategy, with his Blue Whale Growth fund sailing ahead of IA global peers during the height of the pandemic, which led to the fund tripling in size in 2020.
But with inflation and interest rates on the move, increasing the cost of capital, he has had to make adjustments.
Earlier this year, he fortuitously ditched longstanding holdings Meta and Paypal before they saw billions wiped off their share prices off the back of disappointing results.
Toward the end of 2021, he sold out of Amazon over inflation concerns, leaving Google parent Alphabet as the only Faang stock still in the portfolio.
Despite these well-timed exits, Blue Whale Growth lost 30.3% in H1 2022, more than double the IA Global average (14.1%).
Nvidia, which makes graphics chips used in gaming and crypto mining, was one of the biggest detractors from performance, as was Australian software company Atlassian. The former’s share price is down 47% year-to-date, while the latter has slumped 46%.
Pharmaceutical and lab equipment supplier Sartorius was another laggard, with shares falling close to a quarter this year.
Inflation narrative will taper off as recession risk ramps up
However, top 10 holding Nintendo has held up better (+15%) thanks to strong sales for its Switch video game console. Visa and Mastercard were also highlighted as positive contributors, though both are trading at a discount compared to the start of the year.
Yiu said he hoped to see a return to outperformance on a relative basis “at least in the coming months”.
“Whilst the first half of the year has been characterised by inflation and interest rate risk, we anticipate that the inflation narrative will taper off whilst we head towards greater recession risk,” he said.
“As the cost of capital is likely to remain high, the Blue Whale portfolio of companies maintains a net-cash balance sheet, with high gross margins and strong pricing power.
“The relative valuation of high-quality tech businesses in the portfolio is attractive when compared to those sectors which have done comparatively well in the first half – sectors such as consumer staples which now trade at a significant premium to the market.”
Blue Whale Growth top 10 holdings
| ASML | Mastercard |
| Atlassian | Microsoft |
| Charles Schwab | Nintendo |
| Intuit | Nvidia |
| Lam Research | Visa |
Source: Blue Whale Capital
See also: Peter Hargreaves defends Blue Whale as losses mount
