Stephen Yiu runs a high conviction portfolio and is co-founder of the company, Blue Whale, alongside Peter Hargreaves. Juliet Schooling Latter, research director, FundCalibre, talked to him about the fund and its heavy bias towards technology firms.
“Why would you not want to be exposed to technology?”
That’s the view of LF Blue Whale Growth manager Stephen Yiu, who believes we are in the midst of a generational shift in the more widespread adoption of digital infrastructure that’s been thirty years in the making.
Stephen believes there are some common misconceptions surrounding the tech sector – namely that it is a special, homogenous sector; anything related to it will do well; and that the recent stellar outperformance is a repeat of the bubble of the late 1990s. He fundamentally rejects all three and has backed that up with a 60% holding in technology-related stocks*.
However, Stephen will be the first to tell you this is not a tech fund, adding that it had half its current exposure to the sector when it first launched three years ago this month.
Blue Whale is one of the new boys on the block. The company was co-founded by Peter Hargreaves, who also co-founded Hargreaves Lansdown, and Stephen – a one time employee at Hargreaves who approached Peter about his idea for a new asset management business. The company is designed to challenge the status quo of the industry with its concentrated high conviction approach targeting significant outperformance.
Stephen has managed the fund since its launch in September 2017. He began his career at Hargreaves Lansdown and has worked at the likes of Artemis and Nevsky Capital during his career in fund management.
The fund’s philosophy is refreshingly simple: to produce a high conviction portfolio of stocks from the very best ideas. The team looks globally, not wanting to miss out on an idea because of some arbitrary geographic rule. Stephen only invests in the very best opportunities – with an absolute maximum of 35 stocks – paying no attention to indices or benchmarks. Businesses with structural challenges or those which are difficult to forecast are generally avoided and a lot of the team’s work begins with detailed industry analysis.
‘Quality’ is judged on whether a company has: a strong competitive position; a business model which is not easily disrupted; the ability to grow over time; resilience across economic cycles; a strong balance sheet and a knowledgeable management team. Valuation is also an important part of the process.
The fund is very concentrated, with more than 50% of its value in its top ten positions and it has a very high active share. Stock selection is therefore a key risk, as well as the key opportunity for excess returns.
While the portfolio will typically show a heavy bias towards technology firms, this is actually a simplistic analysis of the holdings. In reality, many tech stocks do not pass their strict quality criteria and are excluded. For example, there are generally no hardware companies.
Stephen believes many of the sectors the fund is invested in will be the beneficiaries of strong and sustained secular growth trends – many of which are expected to accelerate post Covid-19.
A classic example of this would be ecommerce and payments, where the pandemic has accelerated the move towards contactless and online payments (both VISA and PayPal sit in the fund’s top 10 holdings)*.
Since launch, the fund has returned 71.2%** to investors – miles ahead of the average return of 25.3%** for funds in the IA Global sector. The fund has an ongoing charges figure of 0.89%*.
We like the team’s disregard for any sort of benchmark, and we applaud their determination to invest in its own research. We also like the manager’s willingness to be pragmatic and the fund’s ability to adapt. When a fund has such strong conviction, the proof is ultimately in the pudding and I don’t think you’ll find a disappointed investor thus far.
*Source: Fund factsheet, 31 July 2020
**Source: FE Analytics, total returns in sterling, 11 September 2017 to 24 August 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
