| Stephen Yiu is the Chief Investment Officer at Blue Whale Capital and Lead Manager of the Blue Whale Growth Fund. Stephen co-founded Blue Whale Capital with Peter Hargreaves, co-founder of Hargreaves Lansdown, in 2016. The Blue Whale Growth Fund was launched in September 2020 and is a long-only global equity fund focusing on developed markets. Stephen adopts a high conviction, active approach based on bottom-up, fundamental research. |
As we approach the halfway point of 2022, we feel it is necessary to discuss the recent performance of the fund.
The fund has suffered over the first half of the year. We make a point to always present our performance relative to our comparator benchmark and therefore do not hide the fact the fund (Blue Whale Growth Fund T EUR Class) is down 23%, compared to the IA Global Sector average of -8% in 2022 (data for period 01/01/2022 – 30/04/2022). As a long-only fund dedicated to investment in our asset class, we will suffer when markets fall as they have in the last six months.
Here we review the performance in light of the Ukraine crisis and inflation woes which have weighed heavily on markets this year. In times of such macroeconomic headwinds, we often see a rotation into cyclical sectors such as oil and gas, utilities etc. It is therefore no surprise that the top performing companies in both the S&P 500 and FTSE 100 over the last 6 months have fallen into these categories. This brings me onto my first point – the Blue Whale Growth Fund is founded on a philosophy of investing in high quality businesses, at attractive valuations. The problem is that we would, in general, define businesses in the cyclical sectors as lower quality. It would be hard to argue that BT and Chevron offer the same level of quality that you would see from Microsoft and Alphabet, for example. We consequently do not sacrifice quality in the portfolio for short-term performance.
If we are invested in high-quality businesses, what has caused this underperformance year to date? Firstly, it is the rotation into cyclical stocks (miners, oil and gas in particular) which we shun. Secondly, whilst we have avoided the low-quality segment of the tech sector (Peloton, Netflix etc.), such companies are weighing on the sector as a whole. As their business models have come under greater scrutiny following the share price exuberance during the pandemic, the whole sector has taken a hit indiscriminately.
Short-term underperformance, whilst displeasing, is to be expected in any portfolio. Legendary investor Benjamin Graham famously said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” He was explaining that trends and fashions will drive short term prices, but eventually the share price will always be representative of the quality of the business.
Running a concentrated portfolio, whilst giving us the greatest chance for long-term outperformance, will exacerbate short-term underperformance. Each company in the portfolio was chosen for both its quality and its attributes. We consider they are particularly appropriate in mitigating against the key macro-risk factors of the moment – inflation and the Ukraine crisis. Put simply, the portfolio has negligible exposure to Russia, and has, what we believe to be the ultimate combination of high gross margin (70% on average across the current portfolio) and strong pricing power to combat inflation. You can read more about this in our articles “Stagflation – look for the Holy Trinity” and also “Cov-flation – the opportunities for investors in this unique inflationary environment”.
After thorough examination of the companies in the portfolio over the last few months, do we see any issues? In short, no, we only see opportunity. We define risk in the portfolio as potential for permanent loss of capital based on company fundamentals. It is hard to imagine a world in which the likes of Microsoft and Google do not play a key role in our day-to-day lives. The indicators show that such companies are only going to play a greater role in the global economy going forward. The portfolio invests in several companies that will see greater integration in a digitising world. The latest round of results for such companies, just last week, has vindicated this belief. The high-quality businesses in which we are invested are now offered at a discount to their price of six months ago, yet their prospects, if anything, look better. In the event of a deep recession (which we do not consider a likely outcome) stock markets and even the best long-only funds would doubtless suffer more pain. In those circumstances holding high quality companies would be even more important.
In summary, at Blue Whale we cannot promise consistent short-term returns, but we can promise to only invest in companies of the highest quality. The areas in which we invest, along with the market in general, have taken a hit over the last six months. This has allowed us to deploy cash into those businesses that we see offering the best opportunity for outperformance over the medium to long term. The macro challenges facing the world mean we have had to apply even greater scrutiny to our portfolio. A raft of key disposals in late 2021 and early this year, has mitigated some negative performance in the fund, whilst we have refined the portfolio with a view to defending against further disruption. We are confident that the portfolio is consequently positioned to benefit from secular trends, such as global digitisation, whilst defending against inflation and macro uncertainty.
It is you, our investors, that we value most highly. Many of you have been with us since the early days of Blue Whale, but we are also mindful there are a number of you who will have invested over the last couple of years. It is humbling that so many of you have continued to invest during this turbulent time, demonstrating your trust in our process, as the Blue Whale Growth Fund sees net inflows for the year so far. We all know that equity investments should be viewed over a five year period but we hope our medium to long-term record of outperformance, our regular updates, and the types of company in which we are invested continue to give you comfort during this disagreeable time for markets. Looking forward, we strongly believe the companies in which we are invested have the potential to deliver outperformance given at least a medium-term view.
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Blue Whale Growth Fund is manufactured by Blue Whale Capital LLP and represented in Malta by MeDirect Bank (Malta) plc.
Blue Whale Key Risks & Disclaimers:
The Blue Whale Growth Fund was launched in September 2020. All references to actions before this date relate to the LF Blue Whale Growth Fund. Information on the LF Blue Whale Growth Fund is provided for comparison purposes only; it is a UK UCITS which is not registered for sale in nor is it promoted to investors in the EEA. Whilst the investment objectives and charges are not identical, both funds are run on the same investment process.
Please note that the information provided in this article is not to be construed as advice and any views we express on holdings do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk. Past performance is not a guide to future performance.Blue Whale Capital LLP is authorised and regulated by the UK Financial Conduct Authority.
There are significant risks associated with investment in the Fund referred to herein. Investment in the Fund is intended for investors who understand and can accept the risks associated with such an investment including potentially a substantial or complete loss of their investment.
Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and the value of your investment may be volatile and be subject to sudden and substantial falls.
Investment in a Fund with exposure to emerging markets involves risk factors and special considerations which may not be typically associated with investing in more developed markets. Political or economic change and instability may be more likely to occur and have a greater effect on the economies and markets of emerging countries. Adverse government policies, taxation, restrictions on foreign investment and on currency convertibility and repatriation, currency fluctuations and other developments in the laws and regulations of emerging countries in which investment may be made, including expropriation, nationalisation or other confiscation could result in loss to the Fund.
Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Fund charges may be applied in whole or part to capital, which may result in capital erosion. The Authorised Corporate Director may apply a dilution adjustment as detailed in the Prospectus. The Fund is not traded on an exchange or recognised market.
The foregoing list of risk factors is not complete, and reference should be made to the Fund’s Prospectus, KIID and application form.
MeDirect Disclaimers:
This information has been accurately reproduced, as received from Blue Whale Growth Fund. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
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