Having set its sights on hitting £100m in assets under management after one year, the team behind the LF Blue Whale Growth fund reached their first target at the end of February.
The slower-than-hoped-for rise in assets since launch in September 2017 belies the solid performance of the fund, however, which had a particularly strong showing last year when other more-established strategies struggled to weather the challenging market conditions.
“Last year the fund was up 8.6 per cent and the market [MSCI World index] was down by 3 per cent: the peer group, embarrassingly, was down [almost] 6 per cent,” said Blue Whale Capital founder Stephen Yiu.
Performance of fund vs sector & index in 2018
Source: FE Analytics
“In a down market we outperformed and part of the reason is that we have got a lot of good stocks,” added the fund manager.
“Obviously that is true, but if we go back the macroeconomic uncertainty and look at the majority of the companies in the fund, they had very little correlation with what happened in the macro scenario.” 
Issues such as Brexit, the Chinese slowdown, US president Donald Trump’s tariffs, the Federal Reserve’s normalisation process and European issues did not have such an outsized impact on Yiu’s portfolio of large-cap, global stocks.
“Not only are we avoiding a lot of names exposed to macro uncertainty, also the stocks that we have in the fund are not impacted,” said stockpicker. “We get the double whammy: we don’t have any losers in the fund in terms of the macro and they are actually beneficiaries.”
Yiu (pictured) – who was recently named an FE Alpha Manager, having previously managed money at New Star, Artemis, hedge fund Nevsky Capital and Hargreaves Lansdown – said that Blue Whale’s approach to stock selection has helped it to outperform.
The manager said the bottom-up research undertaken by the firm identifies the companies that have the best potential upside, which helps it to meet its performance target.
“We aim to outperform the benchmark by over 5 per cent per annum over the cycle and our target is quite important in that it sets our minds to focus when we’re looking at stocks,” he said.
However, he said it is important not to fall in love with a stock, so that regular reviews of holdings are held.
“As we all know markets can become expensive over time, which means the upside potential could become less,” the LF Blue Whale Growth manager explained.
“At times we will be asking ourselves ‘over the next 18 months or two years, is that potential still there?’ If the answer is ‘no’ then maybe we would revisit the investment case.”
So far this year, LF Blue Whale Growth has made a 14.04 per cent total return against a 10.50 per cent gain for the MSCI World index and a 9.95 per cent return for the average peer.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Yiu acknowledged that it may not always be possible to outperform but there are a number of methods the team uses to limit downside and deliver superior performance.
For example, the team avoids banks – a big portion of the benchmark – over transparency concerns. While this could lead to underperformance during any rally, equally it protects the fund from any broad-based sell-off.
In addition, the team’s high conviction approach can help outperformance. With the portfolio made up of just 28 stocks, any holding will be a significant overweight to the benchmark.
“The largest position in the benchmark is Apple at around a 2 per cent weighting and there are over 1,600 stocks in the benchmark,” he explained. “As long as we’re comfortable with the stocks in the fund – not only that they’re high quality but at the same time they are at attractive valuations – in theory we should be able to beat the benchmark every time.”
The top 10 holdings in the fund make up 48.7 per cent of assets and include household names such as sports outfitter Adidas, retail disruptor Amazon, online payments firm Paypal, medical equipment firm Smith & Nephew and IT companies Adobe, Microsoft and Cisco.
That level of concentration can leave LF Blue Whale Growth exposed to greater volatility, admitted Yiu, but the team prefers to define risk as permanent loss of capital rather than worrying about short-term fluctuations.
“You have to remember that this is a concentrated fund and you would expect higher volatility than the benchmark,” he said. “Secondly, it is a long-only fund, not a hedge fund or absolute return fund: if the market goes down we will lose money. We might lose less but we will lose money.”
As such, the LF Blue Whale Growth fund manager said investors should take a medium-term view of three-to-five years for the fund.
“If you take a three-to-five year view – which is what the product is designed for – volatility doesn’t matter because you’re not trying to trade the fund and you’re making significantly more money,” the manager said.
“This is what Warren Buffett said. Why do you care about volatility? It’s all about the end game. If you’re going to retire in 20 years, you only care about what you have in your pension when you retire.”
Reaching the £100m milestone may have taken longer than the manager anticipated, but Yiu said that this was always likely to be a challenge for a new firm and new offering, particularly against the risk-off backdrop last year.
“It’s a difficult journey, we’re getting more traction now, but still there are two things that didn’t work in our favour of growing the business,” he said.
“One, it is a new fund and we haven’t got a three-year track record. We have done well but a lot of people only look at three years, or five years even.
“The other thing – which is typical as well, but what I probably underestimated – is that we are a new company. Let’s say we are a new fund under an established brand, that’s easy, people are already familiar with the brand they probably already would have invested in some of their funds.
“But Blue Whale is a new fund, it’s a new brand. It’s unusual to have such a high-profile start-up in the industry. The last was Fundsmith and that was back in 2010, you haven’t seen one like Blue Whale recently.”
Backing of £25m from Hargreaves Lansdown founder Peter Hargreaves made the launch possible, said Yiu, otherwise it would have proved much more challenging to raise funds as a new company and strategy.
“A lot of people don’t want to take the risk, because what if it goes wrong?” he said. “If we had launched Blue Whale and in a year’s time it hadn’t done well, investors would have asked ‘what happened’.
“It’s understandable. It’s better to invest in a fund that underperforms or doesn’t have superior outperformance: there’s no reputational risk, you can just go with the flow.”
Since launch LF Blue Whale Growth has made a total return of 27.42 per cent, compared with a gain of 8.39 per cent for the MSCI World index and a 8.00 per cent return for the peer group.
Performance of fund vs sector & index since launch
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.89 per cent.