WS Blue Whale Growth

WS Blue Whale Growth fund has come storming onto the global equity funds scene since its launch in September 2017. It is a truly active fund with a very concentrated portfolio of just 25 to 35 stocks. The fund only invests in the highest quality businesses, although the manager pays close attention to valuations. He also ignores structurally challenged industries or businesses. The fund may not have been around long, but its strong performance has certainly drawn attention.

Previously LF Blue Whale Growth.

Our opinion

WS Blue Whale Growth is an exciting new fund. It has a very clear philosophy and the manager knows exactly what sort of companies he wants to own. We like the team’s disregard for any sort of benchmark, and we applaud the determination to invest in its own research. We also like the manager’s willingness to be pragmatic and the fund’s ability to adapt. The fund may be young, but the execution of the process and its performance has been excellent so far.

Fund manager

Stephen Yiu is the lead manager and the co-founder of the WS Blue Whale Growth fund. Stephen started his career at Hargreaves Lansdown, before leaving in 2007 to work with Tim Steer - first at New Star and then at Artemis, where he managed or co-managed several funds. Immediately before launching the Blue Whale fund, Stephen worked under Martin Taylor and Nick Barnes at Nevsky Capital.

The journey for Blue Whale has just started, there is no room for complacency in this company if we’re to sustain our consistent significant outperformance. As I tell my team, we strive for perfection but excellence will be tolerated.

Stephen YiuFund manager

Investment process

The WS Blue Whale Growth fund’s philosophy is to produce a high conviction portfolio of stocks from the very best ideas. To achieve this the team is extremely well-resourced to make sure it can find those ideas. It also looks globally, not wanting to miss out on an idea because of some arbitrary geographic rule. The team invests only in the best opportunities with an absolute maximum of 35 stocks and pays no attention to indices or benchmarks. Businesses with structural challenges or difficult to forecast are generally avoided. And lot of the team’s work begins with a detailed industry analysis.

‘Quality’ is judged on the following terms: competitive position – a strong competitive position and the ability to earn a high return on invested capital (ROIC); risk of disruption – the company should have a business model which cannot be easily disrupted; growth – the ability to grow significantly over time; macro-sensitivity – resilient across economic cycles; balance sheet – a manageable capital structure which does not rely on leverage; and management team – management should be knowledgeable, effective and motivated.

Valuation is important.

A cursory look at the portfolio will typically show a heavy bias towards technology firms, but this is overly simplistic. Many tech stocks do not pass their strict quality criteria and are excluded. For example, there are generally no hardware companies in the portfolio. Stephen has an extreme preference for SAAS (Software as a service) businesses. These businesses typically have a very high level of repeat business making them very high quality and making it easier to predict their future. The advent of cloud computing has made many of these businesses possible.

ESG

ESG - Integrated  

Stephen uses ESG factors as an input - along with many others - when assessing a stock, and these inputs make a material difference to stock selection. With such a concentrated portfolio, selecting those firms avoiding potential ESG issues is key. For environmental factors, Stephen is looking for companies that are becoming more efficient and reducing the environmental impact of their business practices. He will also avoid those firms where environmental concerns hamper the future profitability of the business, such as coal mining companies. With social factors, there is a focus on avoiding firms with poor labour practices and looking favourably on those promoting financial inclusion. Finally, on governance, Stephen is looking for those companies with strong internal controls, that have a good corporate culture and a compensation programme which limits the risk of mismanagement, which can lead to low growth, high debt or even fraud.

Risk

The WS Blue Whale Growth 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. The fund has a heavy bias towards technology and does not invest in banks, mining or energy companies. It has a heavy growth bias as a result. Although it has a global remit, the fund currently has very little in Asia and emerging markets. Over half of the fund is typically invested in companies listed in the United States.

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