A willingness to sift through “the plethora of opportunities” in the highly entrepreneurial US market in a bid to find the small number of “real gems” is what convinced Hargreaves Lansdown co-founder Peter Hargreaves to back Stephen Yiu when he launched the Blue Whale Growth fund three years ago.
Many financial advisers will not back a fund until it has reached its third anniversary, however anyone taking this approach with Blue Whale Growth would have missed out on some impressive returns: the fund has made 72.22 per cent over this time, compared with 28.47 per cent from the MSCI World index. This is enough to put it 12th of the 291 funds in the IA Global sector with a track record of this length.
Performance of fund vs sector and index since launch
Source: FE Analytics
Yet while Hargreaves had no fund track record to go on when buying into Blue Whale, he had known Yiu since 2002 when the latter joined Hargreaves Lansdown.
“We have regularly kept in contact,” said Hargreaves (pictured), who is now chairman of Blue Whale. “Eight years ago, Stephen registered Blue Whale Capital – the aims and the markets it would encompass were still to be decided. It took four years of research and deliberation, with the journey commencing on 16 August 2016. At lunch, Stephen detailed his thoughts and ambitions – I was so keen on the idea I pledged my full support.”
It took a year to put everything in place, with the fund not launched until 11 September 2017, and while Hargreaves had “no doubt from the beginning that this would be a success”, he said he did not envisage it would be “in such a fantastic position so soon – especially considering the unenviable market conditions the team has had to navigate”.
So why does the chairman think the fund has done so well?
“First, I need to mention the investment in the team – I know of no investment management business that throws so much research into just one fund; four investment professionals in addition to Stephen,” he said.
“Secondly, I have mentioned before Stephen’s interest in the US. Before we started the fund, he made it clear to me why he was finding so many opportunities there. For years I had been looking for a fund that could give me exposure to this most exciting of economies and its highly entrepreneurial companies.
“Unfortunately, UK-based managers seemed neither interested nor capable of sifting through the plethora of opportunities in the US to find the real gems. Stephen assured me he was interested and could certainly highlight those that he saw as having the greatest potential. Results to date have been extremely positive and the diversification to my portfolio has been an added bonus.”
Aside from the strong total returns delivered since launch, Blue Whale Growth has also performed well in down markets, making 8.39 per cent in 2018 when its index and peer group lost money. It is also up 21.44 per cent year to date.
Performance of fund vs sector and index
Source: FE Analytics
Hargreaves attributed the fund’s strong performance this year to two key tenets of its investment approach: the willingness to move out of stocks should they not represent the best opportunities for growth and the focus on finding the “winners of tomorrow”.
“It was of enormous comfort to me to have spoken to Stephen during the height of the pandemic,” Hargreaves continued.
“He explained how the fund focused on those companies leveraging global digital transformation. Indeed, as the world moved online during Covid-19, the fund did benefit. At the same time, he explained his ruthless approach in dealing with those investments that would likely suffer due to Covid-19 – he simply cut them from the portfolio.
“This was a breath of fresh air. I know of many investment professionals that hold on to ‘losers’ in the hope they will come good. Cutting your losses and moving on takes real conviction – a trait I love to see in people investing on my behalf.”
Hargreaves finished by saying that while many fund managers in the twilight of their careers are slow to understand the “new world”, the Blue Whale team is part of it and understands “new technologies, new entertainment streams and new work patterns”.
“Today, I am pleased to report the team is studying and assessing which disruptive enterprises will be next to take the world by storm,” he added. “There are still many opportunities – I am confident they will find the better ones.”
Of course, a fund can’t outperform year in, year out forever, and many value investors claim that they are due a day in the sun at the expense of growth strategies such as Blue Whale Growth which have dominated over the medium term.
However, Yiu’s riposte to this argument is simple – he classes himself as a value investor.
“This sometimes gets people confused because they’re accustomed to self-styled value investors avoiding the types of companies that have done so well for our portfolio over the last three years,” he explained.
“They are accustomed to seeing value funds buying low quality, low growth, structurally declining – and often cyclical – businesses, then justifying these decisions based on ‘cheap valuations’.
“We see things differently. We treat ‘value’ as a verb, not a noun. To value a company involves a process of understanding the worth of its future cashflows beyond its present state. To make money doing so involves finding companies where the value we see is significantly greater than the price we have to pay. That is why we focus on high-quality businesses with structural growth drivers instead of slow-moving companies trading at low valuation multiples.”
He finished: “Value investing is about valuing what you are buying, not just buying it cheaply.”