Investing into just one fund is not what any financial adviser or manager would typically recommend, instead championing diversification across several portfolios. But that is not the route FE fundinfo Alpha Manager Stephen Yiu has taken, putting his entire investment portfolio into his LF Blue Whale Growth fund.
Yiu said he does this to demonstrate his total commitment to his fund’s investment process. “It doesn’t make sense if I start investing in our direct rivals, Fundsmith and Lindsell Train, and try to diversify with them just in case they’re performing better than us. What does that say to your investors if you’re buying your rivals?” Yiu said.
There is an ongoing debate about whether or not managers should disclose how much money they have invested, but Yiu said this is the wrong question. “The question should be, what other funds are you invested in outside of your own? And do you have more or less invested in other people’s funds?” The point being that if a manager back someone else’s fund more than their own, should investors support them?
“I think it’s important to show that if you’re running a strategy that you want to sell to your investors that you’re backing it with your own money,” Yiu added.
The Blue Whale Growth fund is the flagship product of Blue Whale Capital, which was founded by Yiu and Peter Hargreaves in 2017. Yiu has run the fund since it launched, during which time it has ranked in the top quartile for every time frame, making 113.4% total returns and beating the average IA Global fund (61%).
Performance of fund vs sector since launch
Source: FE Analytics
It already holds an FE fundinfo Crown rating of Five and is £1.1bn in size but Yiu said the ambition is to be the best global fund available and outflank the some of the sectors biggest names, such as £29bn Fundsmith Equity and £8bn Lindsell Train Global Equity.
“We should be doing better than them, so I would never be interested in investing in those funds even though they’ve done well. I think we can do even better than them,” Yiu said.
Below, the Alpha Manager tells Trustnet why he is frustrated with active managers and why he continues to back Nintendo, despite it being his biggest loss maker this year.
What is your stock picking process?
The philosophy is to invest into 25-to-35 very high-quality businesses at an attractive price. We do all the research in-house, which gives us a proprietary edge in terms of understanding about those businesses. And the outcome of this, if we do get this right, is significant performance, or at least the potential for it.
Why should investors pick your fund versus other global funds?
We strongly believe that for fund managers to do well they need to run a high conviction mandate. If you have a team of people focusing on 25 companies, the chances that we would get those companies right is higher than competitors who focus on more stocks, or have less resources.
That is how you justify your active management fees, which I don’t think a majority of global funds do, hence why passives and ETFs are taking quite a lot of market share from active managers. We’re trying to justify that there's a role for active managers and the way to do that is to deliver significant outperformance to justify the fees.
What have been your best and worst calls over the past year?
One of the best performing stocks was Atlassian, it’s like Microsoft Teams but for software developers.
The company has made 65% returns year-to-date (8/12/2021).
Two very interesting things have happened with Atlassian this year. Firstly it increased prices by five times. That sounds dramatic in multiple terms but it’s an increase from $2 a month to $10 so the actual amount you pay is still quite insignificant. If you compare that to Microsoft which is rolling out a 15-20% price increase next year it’s not that much.
Secondly, software developers have, I think, become one of the hottest skillsets and commodities out there. It’s one of the most highly skilled and in demand jobs and, given Atlassian’s market position and product demand, it does capture a good chunk of the market.
The worst stock was Nintendo. We added it to the fund at the end of 2020, and it has been on of the biggest detractors in the fund this year, losing 19%.
It had a bad year because wasn’t able to launch the highly anticipated new Switch Pro because of chip shortages so had to settle for a semi-upgraded version of the current Switch, the Switch Oled. It’s not a significant upgrade like the Pro would have been and, although it has sold, it wasn’t at the magnitude the Switch was expected to sell at.
But we still like the company, even though it’s not in our top 10. The valuation is extremely attractive, it’s almost at value stock levels, but we don’t think it is a thesis violation because it is still a high-quality business and fits our process.
What is the most exciting stock in the fund?
The most exciting stock is Adobe, which has been a top 10 holding since we launched. It is exciting because we don’t have to do much with the company, the thesis remains in place and it continues to be a market leader in digital content, which has only grown the past few years.
Are there any sectors you won’t invest in?
We don't invest into anything that's low quality or highly technical or cyclical or anything we cannot analyse. For example banks is something we would never invest in because you can never get to the bottom of their balance sheets. We know from the global financial crisis that not even the bank’s management team has any idea really.
Do you consider environmental, social and governance (ESG) in the fund?
Yes, but I will stress that this is not a high impact or ESG fund. We don’t actively seek the ESG elements in companies. What we do is define ESG as risk factors and assess whether they will have a material impact on whether or not a company is good quality.
What frustrates you the most about the investment industry?
It goes back to what I said before about justifying your active management fee. Looking at global funds, there are so many that are not performing well but are still running a lot of money. Who is still giving them money?
What do you like to do outside of fund management?
Outside of work I like to go skiing and travelling. I like wines, good restaurants, meeting up with friends, going to galleries like the [Victoria & Albert] V&A.