Blue Whale is mulling the idea of launching an investment trust to tap into smaller companies.
During a Q&A session with Stephen Yiu (pictured left) on Wednesday, the manager of the £790.7m Blue Whale Growth fund said rolling out an investment trust is something the firm is considering at the moment.
“I think from an investment strategy perspective we definitely would like to have some sort of permanent capital base we can go into smaller companies rather than the super large mega-cap companies,” said Yiu.
Potential trust could be a rival to Terry Smith’s Smithson
Tapping into smaller companies would mark a big departure for Yiu who has found success investing in Silicon Valley giants like Facebook and Google parent Alphabet.
However Chelsea Financial Services managing director Darius McDermott thinks Blue Whale has a “very strong process and philosophy which could do very well in smaller companies”.
McDermott compared a potential Blue Whale trust to Fundsmith’s investment trust Smithson, which invests in mid and small companies.
Ben Yearsley, investment consultant at Fairview Investing said that while he is a “big fan” of Blue Whale, the only question he would ask is “what will they do differently with the trust that they can’t or won’t do with the fund?”
Challenge will be raising enough at IPO
Yiu highlighted that the challenge for a new company such as Blue Whale, which has only been around since 2017, is raising enough money at the IPO of the trust.
He said: “We started this fund [Blue Whale Growth] with £25m four years ago. Because it’s an open-ended fund we can take in money day after day and now we’re just short of £800m but we didn’t get to £800m within a year or two.
“I think if you were to launch an investment trust today, the bar is pretty high – you probably need to raise maybe about £200m to £250m but you need to do it in a single day.”
Yiu added: “I think this is a business challenge, whether we can raise that much money within a short space of time and yet to be seen but it’s something that we do consider actively.”
See also: Blue Whale goes on hiring spree after growth fund triples in size
McDermott thinks Blue Whale would attract support given the performance of its flagship fund.
“Blue Whale have waited enough time until their main fund has a good track record which will be four years old in September and the fund is now over £750m,” he said.
“They would of course need to do some book building with clients who might support them as a new trust IPO would likely be targeting a minimum of £100m.”
Stephen Yiu unbothered by value rally
Over the last three years Yiu’s Blue Whale Growth fund has returned 61.8% compared to the IA Global’s 38.1%, according to Trustnet. However, on a six month basis, the fund has slipped into the fourth quartile of the IA Global sector, returning 4.9% versus peers’ 8.4%.
Yiu attributed this lag in performance to being on the wrong side of the value rally over the last six months.
Though he admits he is “slightly disappointed” by the change in sentiment, it’s not something he worries about longer term. “Over the medium term fundamentals always come back in place, which would be the companies that are beneficiaries from digital transformations.”
See also: Blue Whale Growth sees Gucci-owner and Google parent slide into top 10 holdings
Yiu highlighted Adobe as one of his favourite companies in the fund as it still has an attractive valuation as well as being a market leader in digital content creation software.
Yiu said: “Over the years since smartphones were introduced, there’s been an explosion of content in the online space, so the more Youtube video that we consume, the more time that we spend on the internet and digital advertising – Adobe will be at the heart of that.”
He also noted Microsoft’s competitive positioning which was demonstrated by its successful rollout of Teams.
“Because Microsoft is already embedded in our day to day as an office worker, it only took Microsoft 12 months to get to over 100 million users,” he said, noting other competitors like Slack took years to acquire users.
