Blue Whale Growth - devoted to disruption

Jonathon Curtis | Fri 20 September 2019

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• Stephen Yiu invests in companies for their growth prospects
• He’s found the most opportunities in the US and technology sector
• The fund’s had a strong start, but we think it’s too early to judge performance

Our view

Stephen Yiu is two years into his management of the Blue Whale Growth fund, and so far he’s performed strongly, albeit over a short period of time. Yiu was previously a member of the HL investment team, leaving in 2007 to pursue a career in asset management. Since then he’s worked as an analyst and co-manager at various fund groups, culminating in this first lead manager role at Blue Whale.

We like Yiu’s high-conviction approach to investing and think he’s built a high-calibre team around him. We rate him highly as an analyst, as our research shows the funds he’s worked on have done well. We think it’s still far too early to judge his skill as a fund manager though.

Blue Whale Capital is majority-owned by Peter Hargreaves, who is co-founder and significant shareholder, but no longer an employee, of Hargreaves Lansdown.

How does the manager invest?

Yiu invests in companies that he thinks will grow by either being at the forefront of disruption, or will be largely unaffected by it. He’s found most of these in the US – nearly 70% of the fund is currently invested there – with the remainder in developed countries like the UK. His focus on ‘disruptors’ means around half the fund is invested in technology companies like accounting software provider Intuit and cloud-based services company Salesforce.

Yiu prides himself on being a high-conviction manager by investing in only a small number of companies. This means each one can make a big difference to performance but it’s a higher-risk approach than a more diversified one.

What’s striking about Yiu’s approach is how many companies he considers unsuitable for the portfolio. They include banks, pharmaceutical and biotechnology companies, oil, gas, mining and materials companies, those from Japan and any he thinks could be disrupted. From around 1,600 companies in his ‘investment universe’ that leaves only about 100 for him to analyse. By avoiding so many sectors, the fund could lag the market for long stretches if some of them perform strongly.

Yiu is a more active manager than many others in the global sector, buying and selling companies fairly frequently. Around three-quarters of the portfolio was changed last year, and Yiu expects turnover to normally be between 50% and 75%. High turnover can impact returns due to the costs involved in buying and selling companies.

At the moment the fund has 15% held as cash. That’s because Yiu’s struggled to find growth companies at a price he finds acceptable. We think this is a lot of cash for a manager to hold, and prefer much lower levels in a fund, as it can be a drag on performance. Yiu admits the fund would have performed better if he’d distributed the cash among his existing investments.

How’s the fund performed?

Yiu’s got off to a strong start since he launched the fund in September 2017. He’s grown it 39.6%* compared with the broader global stock market’s 17.7% return. That’s not an indication of future performance. Our analysis suggests that’s largely down to his stock picking skills.

Two years is a very short period of time in investing though, which makes it difficult to judge performance. While Yiu’s done well so far, the fund’s investments in large US and technology companies have benefitted from strong tailwinds. We’d like to see how the fund performs in different market conditions before drawing any conclusions.

Blue Whale Growth peformance since launch

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2019

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2019

n/a - Where no data is shown, full year figures are not available.

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