“My aim is to provide investors with the highest return on their investment possible, over the medium term. All I care about is making our clients’ money work as hard as possible,” Blue Whale’s Stephen Yiu tells Portfolio Adviser. “This will come alongside some day-to-day volatility. If this volatility makes people feel uncomfortable, they should perhaps consider lower-growth, less volatile funds. But, in my opinion, you cannot have both. It just doesn’t work like that.”
Stephen Yiu founded Blue Whale in 2016, following a 14-year career in investment. The now-managing partner and CIO first joined the industry running Hargreaves Lansdown’s £300m Multi Manager Income & Growth Portfolio Trust. After then running a UK equity long/short fund for New Star Asset Management (now Janus Henderson), a pan-European hedge fund at Artemis, and a global equity long/short fund at Nevsky Capital, it was his connection with his former employer Peter Hargreaves – co-founder of Hargreaves Lansdown – that led to the launch of Blue Whale Growth fund.
Hargreaves seeded Yiu’s fund with £25m of capital. Today, the fund now has assets under management of almost £1.1bn which includes, of course, a sum still held by the platform giant chair, as well as Yiu himself.
Blue Whale’s performance has been in the top decile since it became available to UK retail investors in September 2017, having returned 143.2% for investors to date (10 June 2023). This places it in seventh place within the 325-strong IA Global sector, and is comfortably double the gains of its average peer.
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But of course, there is no such thing as a free lunch. While the fund has achieved top-quartile total returns over one and five years, and second-quartile gains over the last three (the result of a torrid 2022 when the fund fell by 27.6%), it has done so with higher-than-average annualised volatility, and a larger-than-average maximum drawdown.
“If you ask me today what our mission statement is, it’s to compound your investment at the highest return possible. That’s what we want to do over the medium term,” Yiu explains. “Ultimately, a high-conviction approach is very important. I think it is even more important today, because the only way to justify paying active management fees is to do something really, really different.
“If we were running a 100-stock portfolio, you may as well just buy a tracker instead. Or, maybe it would suggest we are not backing our ideas with conviction.”
He adds that while differentiation can lead to significant outperformance, it can lead to significant underperformance at times too.
“If you don’t want any risk, it means you don’t want any differentiation from your average return. Then, you should just buy the passive.”
Stock selection
Blue Whale Growth will hold between 25 and 35 stocks at any one time although, for the manager, 25 to 30 stocks is the sweet spot.
There are currently 28 company names in the fund, with the top 10 largest positions accounting for 57.8% of the overall portfolio.
These companies are chosen adopting a team-based approach, whereby Yiu – as part of a team of five – will debate every existing or potential holding in the portfolio around the board table at the company’s Mayfair offices. The entire company comes into work at least four days per week, although they have the option to work from home on Wednesdays.
“It means we reach a conclusion far quicker than our competitors. This works both ways, whether it’s an opportunity or a mistake,” he explains.
“We spend a lot of time together, the five of us, so everybody is on top of what is going on. We don’t split coverage by sector, because that way, there is a level playing field knowledge-wise when debating companies.
“It also means that we don’t fall in love with companies. Everyone needs to be able to challenge everyone else. If there is no evidence to back up the merits of a company, that company will be sold – or at least reduced.”
But while there are names in the fund that will come as no surprise to investors familiar with Yiu’s fund – such as Microsoft and Nvidia – there are also significant allocations to the likes of US financial services company Charles Schwab, Italian luxury fashion house Moncler, and oil & gas company Canadian Natural Resources.
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Yiu and the team first bought into Canadian Natural Resources in 2022, and explains that for several months, a majority of his time spent in client meetings would be justifying his allocation to the company’s shares, because it was “different from what people assumed we were trying to do”.
“Now, people don’t ask about that stock any more. First, because it has performed really well. But second, because people now realise why we did it. We recognised there was a regime change due to geopolitical uncertainties and higher inflation, that interest rates would remain higher for longer,” he reasons.
“Given dynamics in the market, we would not have owned this stock seven years ago. There wasn’t a new regime – there were more opportunities in tech.
“But for us, we don’t set out to find an energy company, for example. We just want to invest in the best individual opportunities. We don’t really care whether is stock is seen as a growth company or a value company. We just want to go where we can make the most money.”
Not a tech fund
In terms of sector weightings, which are a result of the team’s stockpicking, the fund’s largest allocation is still to technology companies at more than 40%.
Contrary to some assumption, however, Yiu insists the fund is not a technology-focused fund.
“The reason we ended up in these tech companies is because that was where we were going to generate the most alpha. We have also exited tech names, which we don’t believe will generate alpha any more,” the manager explains.
“At one time, we were very heavily exposed to software names like Adobe and Salesforce, as well as a few others which are less well-known. But the big narrative about them at the time was that they were going through digital transformations and had subscription-based models. And once they sell you a subscription, they can increase their pricing. The loyalty is a lot higher because, if you stop paying Microsoft, you no longer have access to your emails.
“Previously, people could still use the old version of a piece of software without having to upgrade – this was where the transformation opportunity was. But that transition was completed by some of these companies in 2022.”
One of the reasons the fund’s technology weighting remains high, according to Yiu, is that many names are simply not yet understood by investors – particularly those based in the UK.
“I was recently speaking to a contact of mine who works in the hedge fund industry, and he told me I am in the wrong market. That I should be selling the fund to US investors, not UK investors. That, based on our performance track record, we would by now be running a few billion rather than £1bn,” he says.
“I thought it was an interesting comment. Of course, we’re not based in the US. But what he was highlighting is that UK investors don’t understand technology companies in the same way.
“People have a very sceptical view on technology because they don’t understand it, and they don’t take the time to try to understand these companies. They will just read a headline about the Magnificent Seven and how expensive the companies are.”
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He references Microsoft as an example of such a stock, having previously been faced with questions from investors as to whether the company was in a bubble.
“When we first started investing in Microsoft in 2017, only seven years ago, it wasn’t even a $1trn company at the time. Apple surpassed it in size a couple of years later,” Yiu says.
“But at the time, lots of UK investors in particular became concerned. The fact its market cap became the same size as the entire UK stockmarket became a whole issue.
“Microsoft has been one of the longest-standing companies in the fund with a very large position and we have spent a lot of time defending it. Now, Microsoft is a $3trn company. And now, nobody questions us.”
He adds that, now Microsoft is the single largest company in the world and accounts for such a large part of the S&P 500 index, “people finally understand it”.
“Do you buy it now or should you have bought it seven years ago? That is the big debate.
“Of course you’d feel very comfortable about buying Microsoft today because it has established itself, but I guarantee you it is not going to achieve the same returns over the next seven years, that it has managed over the previous seven.”
Nvidia
More recently, the portfolio holding in the firing line has been Nvidia, although Yiu says questions have started to tail off once again as the company has gained popularity.
“We are not taking action yet, but we are debating whether to reduce our position, because the return profile from here is lower than when we first bought it,” the fund manager explains.
“But it’s an interesting company because most people don’t do the work on it, they don’t understand how it works. And, if investors had spent the time on researching it like we did when we first bought it in 2021, when its market cap was $500bn, they could have achieved a lot of value from their investment.
“People [in the UK] tend to have a sceptical view on tech to start with. The reason we ended up with more exposure to tech than some of the other more concentrated global equity portfolios, is because we understood it more. A lot of well-loved companies in the consumer space are already well understood. I guess Nvidia is not a well-known brand with a visible, recognisable product.”
Technology misconceptions
On the flipside of the coin, Yiu says the fund also has exposure to names that investors may place into the ‘technology’ bucket, but which are now “normal” companies surviving in a new world.
For instance, the fund has both Visa and Mastercard in its list of top 10 holdings – payment stocks which were categorised as technology firms right up until 2022
“If you looked at our tech exposure back then, it would have been much higher than 40%,” the manager points out. “At the same time, Amazon, Meta and Google were also categorised as tech companies. To some people, they still are, but over the last few years they have been recategorised.
“Amazon is now consumer discretionary, which makes sense, while Alphabet is now communications and media. These companies are doing exactly these things, just in a different way from how we used to do them. People are now starting to understand this more, but we were early to that realisation. These are not tech companies – they are just powered by tech.
“In terms of the world we live in, the population has increased massively, and we all need to consume things, to live in a certain way. This means that over the last 10 years, and especially since the pandemic, a lot of this has shifted from the physical world to the digital world.
“But it’s the same thing, right? If we had conducted this interview on Microsoft Teams, [Portfolio Adviser] would have still achieved a similar article at the end of it. This is the part that people didn’t understand – that we just are transitioning into a digital world. But we still have the same societal needs.”
The meaning of growth
Alongside common belief that is fund is a technology mandate, Yiu stresses that his fund does not have a growth investment style, either. He explains its name derives from pre-launch discussions with seed investor Peter Hargreaves.
“From Peter’s perspective, there are two types of strategy: income and growth. And of course, this fund does not pay a dividend and its aim is to achieve capital growth. So it was called Blue Whale Growth, rather than Blue Whale Income,” the CIO explains. “But of course, we became known as a ‘growthy’ fund because, during the pandemic, we were holding similar stocks to other well-known, growth-specific strategies.
“But since 2022, our performance has diverged from these well-known growth names and we have continued to outperform. You can see that we do not invest in the same way, based on our recovery.
“If you asked me what my ‘style’ is today, I would just tell you that I want to grow your investment at the highest rate of return possible. We want to invest in the next Microsoft and the next Nvidia, because that’s how to make the most money. You don’t get rich by getting a dividend from Unilever.”
