Blue Whale Capital – London

Founded in 2016, Blue Whale Capital is a global equity specialist based in London and 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 companies. The firm looks to buy companies that will benefit from structural growth trends, are able to significantly grow profits over time, yet also have attractive valuations. They have a long-term horizon and would like to buy a company and hold it forever but understand that sometimes the valuation becomes too expensive or the company’s prospects change.

Stephen Yiu is the 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). Before that he was a fund manager at Hargreaves Lansdown (2002-2007). Peter Hargreaves, is the Chairman and co-founder of Blue Whale Capital, as well as the co-founder and the largest shareholder of Hargreaves Lansdown, a $12 billion FTSE 100 financial services company.

Your performance since launch in September 2017, has been described as “phenomenal” – how do you explain this success?

  • Our strategy is set up to deliver consistent significant outperformance for our investors.
  • There’s a lot 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.

Can you explain the “beautiful companies concept”?

  • We operate a very high conviction portfolio with our top 10 holdings accounting for approximately 50% 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’. This includes for example high quality businesses with a good management team that are able to sustain growth in revenues and cashflow over time.

You have been compared to FundSmith and Lindsell Train in your investment approach/performance – discuss.

  • 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: we see more opportunity in secular themes like digital payments and digital transformation, and our portfolio reflects this.

Blue Whale currently has AUM of approximately $700 million, do you have a target for AUM?

  • Our strategy is very scalable.
  • No fixed AUM target but expect this 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 $10-20bn range and we certainly have the set up to do that too.

IA Global average is your benchmark – what is your performance vs. that?

  • Since inception: 75.9% BW vs. 25.7% IA Global average
  • Annualised: 21% BW vs. 8% IA Global average
  • Performance data is as of 31/8/2020

You have a team of 5 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, eg 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 over $100 billion.
  • Our market cap cut-off is in the low billions. This is what makes our strategy very scalable.

You tend to appear heavily tech skewed – can you explain your approach?

  • 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 and I’ve actually written about this in a recent blog post.
  • We currently have more in tech because that’s where we see the best opportunities for our investors at present. If/when we see greater opportunity in another sector, eg, consumer staples, 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 and risks of government interference.

I believe ROIC 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, plus those where competition erodes profitability, then take away companies with low-quality business models then that leaves only about a hundred names to look at.

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 cashflow growth beyond what’s guided by management.
  • A large portion of the names in our portfolio has remained unchanged since inception.

Share price appreciation goal?

  • We do not manage the portfolio on share price targets.
  • We are more than willing to hold a position and allow it to compound.
  • We will only sell if there is risk of material disruption to the business or if we’ve found a better alternative.

Do you favour buy backs or dividends?

  • We prefer buybacks (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 generating profitability.
  • On the environmental side we don’t invest in mining companies for the costs associated with their negative externalities.
  • On the governance side, we look for sound corporate governance and an effective corporate culture.

You hold 25 – 35 companies and your top 10 holdings (see below), account for 50% of the fund’s value, can you explain why you invested in some of these names?

Our top 10 holdings as at August 31, 2020 are: Adobe, Autodesk, Boston Scientific, Dassault Systems, Facebook, Mastercard, MSFT, SAP, Stryker and  VISA (see latest top 10 list)

  • Adobe has more than 50% of the digital content creation software market. Whenever you view an image, video, website, magazine, or even an app, there is a good chance it was created using its software. We believe Adobe will be a major beneficiary of continued explosive growth in this market, as ever-richer digital content is consumed across devices. Meanwhile, Adobe’s 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 organisation around and cultivated a “winning spirit”. As a result of his actions the future looks bright for Boston Scientific thanks to improved portfolio quality, margin expansion potential and a greater ability to deploy capital than in the past. Moreover, Boston Scientific has diverse growth drivers with growth broad based across every region and every franchise. We therefore believe that the market underappreciates 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 (much of which is still made manually by cash or cheque) and we are confident in their ability to navigate and execute on this multi-decade opportunity.
  • PayPal is a high quality business benefiting from structural growth in digital payments. At its core is a global two-sided payment network operating at scale, storing payment details for consumers while processing online transactions for businesses. PayPal’s scale comes from its first mover advantage at the dawn of the consumer internet. Network effects and superior technology helped PayPal grow users in the tens of millions to more than 250 million in 2018. More recently, PayPal has been extending its lead over competitors through commercial partnerships spanning financial institutions (Barclays, HSBC, Amex) as well as tech giants (Facebook, Google). PayPal’s ability to keep growing its lead – commercially and technologically – gives us confidence that the business is likely to perform well in the long run.
  • Dassault Systèmes’ flagship 3D design software CATIA and SOLIDWORKS are mission-critical to the aerospace, automotive, and wider manufacturing industries. As customers look to digitally transform, they are seeking to work ever-more deeply with Dassault Systèmes. Take the recent Boeing deal; the largest in Dassault’s history, their software will be used by around 70,000 employees, connected to 90,000 machines, and is expected to increase an already significant revenue stream by 2-3 times. We are also optimistic about Dassault’s recent acquisition of clinical-trial software provider Medidata, and their ambition to bring the same digitisation of processes to the Life Sciences industry.

Any sales since you launched?

  • We run a very high-conviction portfolio of about 25-35 companies so when we sell, we usually do so for valuation reasons. However, even when we sell, our coverage for the company would not change as it would be joining about a hundred other “beautiful” companies that we monitor closely on an ongoing basis.

You “eschew broker research” – discuss.

  • The whole investment team comes from hedge fund backgrounds so we’re all very familiar with broker research. Most of the time we’ve found that they don’t provide significantly more value beyond what’s already in company filings, so we go to the primary source where we can.
  • Also, we like to form our views independently of any biases in sell-side research so we 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 their thought processes on strategy and capital allocation, though this is not currently a pre-requisite.

Preferred method of contact (obviously all virtual currently).

  • We prefer one-on-ones when we’re initiating a position.
  • Conference calls and group meetings are good for ongoing maintenance.

Any companies you admire in terms of investor relations/communication and why?

  • We won’t name specific names. Generally, we’ve found that companies with high management quality and strong company cultures have had the most helpful IR teams.
  • Generally, we appreciate it when the IR team is timely and effective in communication, especially when they set up calls with management.

Why should corporates target Blue Whale?

  • We’re one of the fastest growing global funds in the UK ($35m in 2017 and over $700m 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 publicise 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 good reach.

How do you see Covid-19 playing out in the world of investment management longer term?

  • As with many other industries, COVID is likely a catalyst accelerating the changes already under way in the investment management world.
  • The two important drivers for us include:
  • “Active means active”: death knell to closet indexers
  • Fund investors reassessing allocation strategies: There’s little Quality left in Value.

Why the name “Blue Whale”?

For us, Blue Whale is a symbol of scale (significant outperformance) and stability (consistency of outperformance) – which are what we’re aiming to achieve.

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