A high weighting to the technology sector is putting investors off from buying into the LF Blue Whale Growth fund, according to its manager Stephen Yiu. 
Yiu said investors who are worried about a tech bubble automatically dismiss investing in the £68.1m global equity fund, which has a 41.8 per cent exposure to the sector.
“When people come to our website they say: ‘Blue Whale is not a fund for me because they have a lot in tech’,” said Yiu. “This is before we can even explain to them this is not how you should be seeing the companies we invest in.”
While it is true that the fund has an overweight position in information technology stocks than its MSCI World benchmark, Yiu (pictured) said the figure shown on the factsheet doesn’t tell the whole story.
Indeed, the manager said sector weightings failed to explain the real drivers behind the allocation to companies such as Google-parent Alphabet, Amazon.com or Paypal, three of the fund’s top holdings.
MSCI World sector breakdown
Source: S&P Dow Jones Indices
“The only reason why we have such a big exposure to tech is because it is there where we can generate outperformance, where we can make money,” he pointed out.
According to Yiu, there is a tendency to see all the stocks in the sector as a uniform bucket, forgetting the companies making up the index are all very different in nature.
An example is Amazon.com, the world’s highest online retailer. The American e-commerce company was previously categorised as a tech stock but now sits in in the consumer discretionary sector after being reclassified by the Global Industry Classification Standard (GICS).
Additionally, Yiu has welcomed the forthcoming re-classification of the GICS sectors, which will see the creation of a new communication services sector – including tech giants such as Facebook and Netflix – house a majority of growth stocks and see some mis-matched stocks leave the technology sector.
These, he said, will have a positive effect on the sector exposure of LF Blue Whale Growth, reducing the current 41.8 per cent technology weighting to around 30 per cent.
Like Amazon.com, Yiu believes other FAANG stocks – which include Facebook, Apple, Amazon, Netflix and Alphabet’s Google – being seen with a very narrow view and tarred with the same technology brush.
But for the Blue Whale manager, these companies are so embedded in daily life that investors fail to understand the quality of the businesses and the potential for them to continue growing.
“It is very typical for people to have this ‘all-the-companies-in-the-sector-are-the-same’ mindset,” he explained.
“All these stocks’ share prices have gone up a lot over the last few years and people want to be careful with their money – which is the right thing to do – but it is also true the technology sector is the easy one to pick onto.
“People say: ‘okay, the share price has gone up a lot, we are in a technology bubble and I don’t really understand tech’.
“Then they remember the tech bubble in 2000 and they come to a conclusion: ‘I don’t want to have any exposure to technology’.”
But neither Amazon, Netflix, Google or Apple are tech stocks, according to Yiu.
“It’s true that when you look at the semiconductors or the hardware companies 90 per cent of their customers are enterprises, but with companies such as Google or Paypal, their customers are us,” said the manager.
Yiu said some of them – including Apple’s devices – are such a key part of our life that they can be considered as important as a fridge or a washing machine, as many households own more than one Mac or iPhone nowadays.
As such, these names represent a large portion of the LF Blue Whale Growth fund’s holdings given the high-conviction nature of the strategy, which consists of around 25 names from a universe of more than 2,000 stocks.
According to the Blue Whale manager, fundamentals, earnings growth and cash growth back their investment decisions.
Performance of stock over 5yrs
Source: Nasdaq
An example of those attractive stocks is Google, that Yiu noted is growing very nicely, around 20 per cent a year bottom-line and top-line and is also generating a lot of cash.
He explained: “Google is trading at 20x P/E [price-to-earnings], which is very similar to some of the staples or grocery names that trade at that level and it is still growing 20 per cent a year.
“Based on the valuations, the fundamentals and the fact that businesses like Google will probably be sustainable it doesn’t make sense to talk about a tech bubble.
“A bubble will mean the share price trades outside fundamentals and disregarding fundamentals the share price keeps going up, he added. “But all these stocks have been making money so people should look at the tech sector more seriously.”
Not only that, but the fact that these big tech names haven’t been affected by the geopolitical issues impacting other stock prices has helped performance of the fund, Yiu said.
“We have done very well year-to-date and people are surprised, but most of these companies have very little exposure to all the political chaos – including Brexit, China slowing down, Trump’s tariffs, commodity price movements, financials, Italy or the Turkish crisis.”
LF Blue Whale Growth is up 22.59 per cent year-to-date, ahead of the IA Global sector and MSCI World benchmark respective gains of 7.32 and 9.35 per cent.
Performance of fund vs sector and index YTD
Source: FE Analytics
LF Blue Whale Growth has an ongoing charges figure (OCF) of 1.17 per cent.