High-conviction managers are likely to stand a better chance of outperforming in what is a rapidly evolving market environment, according to Blue Whale Capital's Stephen Yiu.
Yiu, manager of the recently launched global equities-focused LF Blue Whale Growth fund alongside Robert Lloyd, said high conviction strategies are the best way to deliver alpha in the current market environment, which has been characterised by greater levels of volatility.
“We think the world is changing and there are lots of opportunities on a global basis and we want to generate alpha, so we need to run a highly-concentrated portfolio,” he explained.
With the firm's first fund launching towards the end of 2017, which co-founder and industry veteran Peter Hargreaves had described as a “good time” to launch, the fund has witnessed a challenging start to life compared with the relatively benign market conditions of last year.
However, Yiu said that the fund's approach of investing in 'fundamentally attractive' companies that have the ability to grow and improve profitability over the long term and those that do not face structural or imminent cyclical issues had helped it weather the sell-offs this year and delivered returns ahead of the MSCI World benchmark.
Performance of fund vs benchmark over six months
Source: FE Analytics
“It’s not easy, we probably launched at a bad time – the market is more difficult now, but year-to-date the market is up 3 per cent… we’re up 10 per cent,” he said.
“If the market can go up another 5 per cent, we should go up by that plus the alpha we generate. If the market goes down 10 per cent, we’ll probably be down 2 to 3 per cent.
“We’re doing the best we can, but I would argue that the environment has become very difficult in terms of more headwinds than tailwinds for the macro.”
One way that manager Yiu and Lloyd try to outperform markets is by taking a high conviction approach towards stock selection, which is aided by its philosophy of carrying out independent research – a lesson learned by Yiu at former hedge fund Nevsky Capital.
Both Yiu and Hargreaves have also been keen on improving investor education and transparency: as such, Blue Whale has made some of its investment research available for free through its website. 
Yiu said that in the retail fund space there are very few fund managers that have tried to increase transparency for retail investors, with the exception of firms such as Woodford IM and Fundsmith.
“The majority of the industry don’t care about the retail [side], as long as they have a lot of flows from the platforms,” said Yiu.
However, the manager (pictured) said retail investors matter and often include friends or family who wish to know what is going on with the funds they have invested in or how decisions are made.
He added: “The industry is not very transparent in what it does, I think Woodford has attempted to make it more transparent but the way he did it with the whole portfolio is unheard of.”
That kind of disclosure leaves long-only managers at the mercy of short-sellers who can take advantage of such information, Yiu said.
“I do feel that it’s not very responsible to put investors’ money at risk. I think his starting point was good [in that] he wants to make it transparent and share what he does, it’s just the wrong direction.”
He added: “What we try to do on that front is share our research, which no one is doing in the long-only space.”
The Blue Whale co-founder said there are numerous reasons for this reluctance: many global managers run diversified portfolios upwards of 100 stocks, making it difficult for them to provide detailed research on individual holdings.
“If you run a highly diversified fund, then there’s no conviction in portfolio names,” he said.
Another reason why some fund managers are unable to share research is that they have not carried out the work themselves, relying instead on sell-side brokerages.
“The problem with that is they don’t do the serious work, which is what the hedge fund industry demands,” he explained.
“We need to generate 5 to 10 per cent alpha per year over a period of time consistently, every single stock will count at any one point in time,” he said. “We’re active, not buy & hold: any stock in the fund needs to deliver 5 per cent returns, if not more.”
Consistency of returns is important for Yiu. Given his background at Nevsky Capital and as an absolute return manager at Artemis, Yiu said Blue Whale eventually aims to launch an absolute return strategy once it has gathered enough assets under management and demonstrated a solid track record.
“This long-only fund is just short of £50m now,” he said. “We really want to use this vehicle as the equivalent to the long book for a [long/short equity] hedge fund. So, alpha is all that matters.”
The portfolio currently consists of around 25 stocks, towards the lower end of its range, and has more than two-thirds of the portfolio invested in US equities, with a further 18.9 per cent held in UK companies.
The Blue Whale manager said the geographic weightings within the portfolio do not reflect a conviction on individual economies, but the sectors (such as technology in the US) containing the types of companies that match its investment criteria.
Indeed, holdings in the portfolio have a valuation that is attractive relative to future growth and profitability.
As such the top-10 holdings within the fund currently include tech giants Adobe, Google-owner Alphabet, Facebook and Microsoft. They also include payment services such as Mastercard and Paypal, and animal health company Zoetis.
Since launch in September 2017, the LF Blue Whale Growth fund has generated a total return of 13.03 per cent compared with a 6.78 per cent gain for the MSCI World index and a 6.32 per cent return for the average IA Global fund.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 1.17 per cent.