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Blue Whale – an ocean of opportunity?

Rob Morgan
New fund management firm Blue Whale is setting its sights on outperformance in the highly competitive global equities sector.

With pressure on charges and an increasing regulatory burden there has probably never been a more challenging time to start a new fund management business. And making in impact with an inaugural fund in the IA Global sector - up against big fish like Nick Train and Terry Smith - is no easy task. Yet Blue Whale Capital appears well equipped to take on the incumbents.

The firm was set up by Stephen Yiu who has an impressive list of fund management names on his CV. Having started out at Hargreaves Lansdown he worked as Tim Steer's co-manager at both Artemis and New Star before moving onto hedge fund Nevsky Capital, which closed its doors in 2016. The young and dedicated Blue Whale team is largely built from Nevsky analysts and they borrow from the process employed there.

The firm’s first fund, LF Blue Whale Growth ticks a number of boxes in its approach to investing. Firstly, it’s truly ‘active’. In other words it invested differently to the make-up of its benchmark index, MSCI World, or a tracker fund that seeks to mimic the index performance. The fund has a concentrated portfolio of around 25 ‘best idea’ stocks with each position selected purely on merit rather than size. A ‘closet tracker’ it is certainly not. Having a small number of stocks means each one makes a more significant contribution to returns but can increase risk.

Mr Yiu also insists on a high level of transparency, which allows any investor a useful insight into the inner workings of the managers’ process. The investment rationales of key holdings are published on their website, and a Q&A section on the monthly factsheet enables investors to email or tweet a question to them directly.

In whittling down a huge universe of possible stocks to a portfolio of a couple of dozen co-managers Stephen Yiu and Robert Lloyd look for firms with business models they can truly understand and that offer sustainable growth prospects the wider market underestimates. They are particularly wary of any business or industry in risk of structural decline or at the mercy of economic or industrial cycles. Although they base their forecasts over years rather than quarters, they are quick to react to short term opportunities, for instance when shares in companies they admire fall in value and a potential bargain presents itself.

Their initial analysis quickly reduces the universe of thousands of global stocks down to 60 or 70 companies that would interest them if they can be bought at the right price. A typical holding is a company with a capital light business model (for instance an internet-based business with few fixed costs), high recurring revenues, loyal customer base and high profit margins. It’s then a case of carrying out in-depth independent research, building models of company earnings and comparing these with the market consensus to establish if there is value in the shares. Mr Yiu emphasises that not all fund managers undertake all this heavy lifting, relying instead on forecasts of third party analysts. In his view, working harder on proprietary research and accepting no shortcuts gives them an edge.

Software and technology companies tend to feature heavily in the portfolio, as do certain consumer goods and services companies as well as payment services firms such as Mastercard. The US is the chief geographical bias, primarily due to the quality of companies as well as the clarity of information available. Amazon, Facebook and Google are all key holdings alongside software firm Adobe, the latter favoured for its loyal customer base of design and photographic users and the switch to a subscription rather than upfront payment model, which it’s believed should substantially increase earnings and margins. Interestingly, only one UK stock, Whitbread, presently makes the grade, indicative of the structural headwinds the managers believe many UK companies face.

Our view

The fund has made an excellent start since launch in September 2017. The focus on fundamentally attractive companies that have the ability to grow and improve profitability over the long term, and do not face structural or imminent cyclical issues, has led to significant outperformance of the fund’s benchmark and peers. It is some evidence of the potential of a truly unconstrained and focused approach to stock picking in adding value to investors, but it is over a very short period and, as always, past performance is not an indication of future returns.

Dominating in the global equity sector in the manner that a blue whale rules the oceans may seem like a lofty ambition for a fund management business that is, despite the name, a minnow. Yet Mr Yiu is aiming high in terms of performance and the disruption of an industry he argues contains many mediocre funds unworthy of client money. The fund is not part of the Charles Stanley Direct Foundation Fundlist of preferred investments across the major sectors.

This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.