Stephen Yiu and Peter Hargreaves launched Blue Whale Capital as an actively managed firm with strong proprietary research. Gill Newton talks to Yiu about the firm’s approach to investing in companies around the world
Stephen Yiu, Blue Whale Capital
Founded in 2016, Blue Whale Capital is a global equity specialist based in London that manages the LF Blue Whale Growth Fund, a global strategy unconstrained by geography. It selects 25-35 stocks at a time, which allows it to invest only in what its research and analysis identify as the best firms.
Blue Whale looks to buy companies that will benefit from structural growth trends and are able to significantly grow profits over time, yet also have attractive valuations. It has a long-term horizon and would like to buy a company and hold it forever, but understands that sometimes the valuation becomes too expensive or the company’s prospects change.
Stephen Yiu is co-founder of Blue Whale Capital. He is also chief investment officer and lead manager of the LF Blue Whale Growth Fund. He was previously at Nevsky Capital (2014-2016) and before that at Artemis (2009-2013) and New Star (2007-2009). Prior to that he was a fund manager at Hargreaves Lansdown (2002-2007). Peter Hargreaves is chairman and co-founder of Blue Whale Capital, as well as co-founder and the largest shareholder of Hargreaves Lansdown, a FTSE 100 financial services company.
Peter Hargreaves once described Blue Whale’s performance since its launch in 2017 as ‘phenomenal’. How do you explain this success? Our strategy is set up to deliver consistent significant outperformance for our investors. Since inception, we’ve delivered 76 percent return versus 26 percent for peers. That’s 20 percent versus 8 percent on an annual compounded basis.
There’s a great deal of hard work involved – we do all our research in-house and we don’t use sell-side reports. We also adhere to a very strict valuation discipline.
Your firm employs what you call the Beautiful Companies Concept. Can you explain that? We operate a very high-conviction portfolio with our top 10 holdings accounting for approximately 50 percent of the fund. We employ what we internally call the Beautiful Companies Concept in our stock-selection process: companies need to fulfil several important criteria that we believe makes them ‘beautiful’. These include, for example, high-quality businesses with a good management team that can sustain growth in revenues and cash flow over time.
Why have you been compared with Fundsmith and Lindsell Train in your investment approach/performance? We have a lot of respect for Terry Smith at Fundsmith and Nick Train at Lindsell Train. They are good stock-pickers and we share a similar fundamentals-driven approach to investing in high-quality businesses. They both run a concentrated portfolio like we do. Where we are different is that we see more opportunity in secular themes like digital payments and digital transformation, and our portfolio reflects this.
Blue Whale currently has assets under management of more than $750 mn. Do you have a target for assets under management? Our strategy is very scalable. We don’t have a fixed assets-under-management target but expect it to grow into the billions within the next few years. Other head-to-head global funds in the UK with similar strategies are in the $10 bn-$20 bn range and we certainly have the set-up to do that, too.
You have a team of five investment professionals looking at 100 companies. Do you split sectors or geographies? We are all generalists. Some have more sector focus for economies of scale in research – for example, in healthcare or SaaS – but that doesn’t preclude anyone from looking at companies in a different sector.
You tend to invest in large/mega-cap companies. Do you have a market cap cut-off? The average market cap for our portfolio is above $100 bn. Our market cap cut-off is in the low billions. This is what makes our strategy very scalable.
You appear heavily tech-skewed. Can you explain that? The topic of tech is an interesting one: we don’t believe this catch-all category does justice to the variety of end-markets served by the SaaS companies we’ve invested in. This is a larger topic that I’ve actually written about earlier in the year.
We currently have more in tech because that’s where we see the best opportunities for our investors at present. If and when we see greater opportunity in another sector, we will shift the portfolio in that direction.
Any sectors or geographies you won’t invest in? We don’t look at banks, natural resources or biotech. We don’t invest in geographies with weak governance frameworks or where there's a risk of government interference.
Return on invested capital is one of your focuses. Any other screens? We don’t do screens. Our idea generation is mostly organic. If you remove industries that are in structural decline and those where competition erodes profitability, then take away companies with low-quality business models, that leaves only about a hundred names to look at.
What’s your investment horizon? We take a long-term view of the companies we invest in. We’ve found that for a lot of the high-quality companies we own, consensus expectations have systematically underestimated the persistence of revenue and cash-flow growth beyond what’s guided by management. A large percentage of the names in our portfolio has remained unchanged since inception.
Any share price appreciation goal? We do not manage the portfolio on share price targets. We are more than willing to hold a position and let it compound. We will sell only if there is a risk of material disruption to the firm or if we have found a better alternative.
Do you favor buybacks or dividends? We prefer buybacks, but it’s very much price-dependent.
Is ESG important? We are long-term investors so we consider ESG factors when learning about the long-term sustainability of a company’s existing business model. We are avid readers of SEC filings so this is something we look out for in 10Ks and 10Qs. For example, on the social side, we don’t invest in gig economy companies where attractive growth in the short term often masks a future reckoning in profitability.
On the environmental side, we tend not to invest in mining companies because of the costs associated with their negative externalities. On the governance side, we look for sound corporate governance and an effective corporate culture.
You hold around 25-35 companies and your top 10 holdings account for 50 percent of the fund’s value. Can you explain why you invested in some of these names? We hold Adobe, Autodesk, Boston Scientific, Dassault Systèmes, Facebook, Intuit, Mastercard, Microsoft, Stryker and Visa.
Adobe has more than 50 percent of the digital content-creation software market. Whenever you view an image, video, website, magazine or even an app, there’s a good chance it was created using Adobe software. The company is a major beneficiary of explosive growth in content creation, as ever-richer digital content is consumed across devices. Its pioneering transition to a subscription model is unlocking international growth opportunities and helping to combat software piracy.
Boston Scientific is an innovative medical device company that has an attractive portfolio of products used within minimally invasive procedures. It is led by an inspirational CEO, Mike Mahoney, who has turned the organization around and cultivated a winning spirit. Thanks to Mahoney, Boston Scientific has an improved portfolio quality, margin-expansion potential and a greater ability to deploy capital. Moreover, it has diverse growth drivers across every region and franchise. We believe the market under-appreciates the durability of Boston Scientific’s growth and the ultimate potential for the business.
Mastercard is a high-quality business benefiting from the structural shift of payments away from cash to mobile, online and contactless transactions. At its core, Mastercard runs BankNet, a global payment network connecting major banks for verifying and processing card payments. Mastercard is able to process hundreds of millions of transactions per day due to its superior technology. Looking ahead, Mastercard is seeking to build on its successes in consumer payments to business-to-business transactions and we are confident in its ability to navigate and execute on this multi-decade opportunity.
Dassault Systèmes’ flagship 3D design software CATIA and SolidWorks are mission-critical to the aerospace, automotive and wider manufacturing industries. As customers implement digital transformation, they are working ever more deeply with Dassault. The latest Boeing deal will see Dassault’s software being used by around 70,000 employees and connected to 90,000 machines, and is expected to increase an already significant revenue stream by two or three times.
We are also optimistic about Dassault’s recent acquisition of clinical-trial software provider Medidata, and its ambition to bring the same digitization of processes to the life sciences industry.
Any sales since you launched? We run a very high-conviction portfolio of 25-35 companies so when we sell, we usually do so for valuation reasons. Even when we sell, however, our coverage for the company would not change as it would be joining about a hundred other ‘beautiful’ firms that we monitor closely on an ongoing basis.
You've said you ‘eschew broker research’ – why is that? The whole investment team comes from a hedge fund background so we’re all very familiar with broker research. Most of the time we find it doesn’t provide significantly more value beyond what’s already in company filings, so we go to the primary source wherever we can. In addition, we like to form our views independently of any biases in sell-side research so we tend to rely on industry journals, conferences and supplier/customer interviews a lot more.
Do you use the sell side for corporate access? We don’t need the sell side for corporate access. In the last five years, we have found it easier to get direct access to IR/management.
Do you like to meet management before you buy a stock? At a minimum, we like to speak with IR to check our understanding of the business. We like meeting management and hearing its thought processes on strategy and capital allocation, though this is not currently a prerequisite.
What’s your preferred method of contact? We prefer one-on-ones when we’re initiating a position. Conference calls and group meetings are good for ongoing research.
Any companies you admire in terms of investor relations? We won’t name names. Generally, we find that firms with high management quality and strong company cultures have the most helpful IR teams. We appreciate it when the IR team is timely and effective in communication, and especially when it helps to set up calls with management.
Why should corporates target Blue Whale? We are one of the fastest-growing global funds in the UK ($35 mn in 2017 and more than $750 mn in 2020) and we’ll be continuously adding to our long-term holdings as we establish ourselves on the asset management landscape in the UK.
Our mission is to give UK savers and pensioners access to the best companies globally so we will often publicize our top holdings across UK print and digital media, too. It’s fair to say that we currently punch above our weight in terms of media coverage as the popularity of Hargreaves Lansdown among non-institutional investors in the UK gives us very good reach.
How do you see Covid-19 playing out in the world of investment management over the longer term? As with many other industries, Covid-19 is likely a catalyst accelerating the changes already under way in the investment management world. The two important drivers for us are:
Why the name Blue Whale? For us, Blue Whale is a symbol of scale (significant outperformance) and stability (consistency of outperformance) – which is what we’re aiming to achieve!
Gill Newton is a partner at Phoenix IR, an independent investor relations consulting firm that also operates Corporate Access Network
