Blue Whale Growth Fund has come into its own in 2020. Since its launch in 2017, its performance is now comfortably ahead of both Fundsmith Equity and Lindsell Train Global.
Key Stats For Blue Whale Growth Fund
- Launched: September 2017
- Manager: Stephen Yiu (turns 42 in July, manager since launch)
- Management firm: Blue Whale Capital LLP
- Type: Open-ended fund
- Benchmark: IA Global sector
- Performance: up 65% since launch (as of 26 June)
- Assets: £408 million (as of 26 June)
- Cost: OCF 0.89% (I units)
- Net cash: 4% (as of 31 May 2020)
- Sector: IA Global
- Links: Website – Morningstar – Link Fund Solutions
[Note: Although I’ve styled this website as ITInvestor, I do venture to the dark side to look at open-ended vehicles occasionally, particularly in the case of global funds where there isn’t an investment trust equivalent.]
The Hargreaves factor
Blue Whale Growth Fund is the only fund run by Blue Whale Capital, a limited liability partnership set up by Yiu and Peter Hargreaves of Hargeaves Lansdown fame.
The Blue Whale website contains this introduction:
‘Eureka’ moments come rarely, but to get two in one lifetime is almost unheard of
Peter Hargreaves, co-founder of personal finance blue-chip, Hargreaves Lansdown, is lucky enough to have been in such a position.
The first Eureka moment was when he got the first batch of cheques through his front door from his first ever Hargreaves Lansdown mailing. Reportedly he threw them in the air and exclaimed to himself ‘I am going to be a millionaire’. He wasn’t wrong. From this point on he made it his life’s mission to champion the consumer in the personal finance market, tear down the walls of stuffy, jargon talking establishments and take the lazy life companies-of-old to task on their charges, lack of transparency and elitist behaviour.
But, having stepped back from Hargreaves Lansdown, Peter was lucky to have a second Eureka moment, when Stephen Yiu – a one-time employee at Hargreaves Lansdown – approached Peter with an idea of setting up a new asset management company, one which also challenged the status quo in the investment management industry. This company is Blue Whale.
It was somewhat fortuitous for both parties involved. Peter, who has long held Stephen Yiu in high regard, was looking for an international fund in which to invest a large portion of his family’s wealth. Stephen was looking for an investor in his new company, and ultimately into his fund.
Having known Stephen for 15 years, it was a simple decision to make. But why Blue Whale and why Stephen Yiu? Well, put simply, the trust Peter has in Stephen is unparalleled. Not only does he implicitly trust Stephen’s talent as a fund manager, but he also believes he will ‘work his socks off’ for the fund – being someone Peter remembers as ‘one of the hardest working individuals I came across in my 45 years in business’. The investment approach Stephen employs has been tried and tested at his previous places of employment, including the hugely successful Nevsky Fund run by Martin Taylor.
Hargreaves’ first Eureka moment did rather more than turn him into a millionaire.
If my sums are correct, he made around £80m from selling some shares when Hargreaves Lansdown floated in 2007 plus another £3m from small disposals in 2013 and 2019.
In February of this year, he sold 37.1m shares in Hargreaves Lansdown raising £550m.
He still owns 115.5m shares, a 24% stake worth £1.9bn, and has probably received around £500m in dividends over the last 13 years.
It’s not clear exactly what Hargreaves did with the proceeds of his big share sale in February but The Mail reported most of it was reinvested back in the market by mid-March.
Some of it seems to have been put into Blue Whale, as Citywire’s Wealth Manager reckons Hargreaves accounted for nearly a quarter of the firm’s assets earlier in June 2020.
Overall, that first Eureka moment has probably made Hargreaves £3bn. To describe the launch of Blue Whale as a second such moment is a bold statement, to say the least!
Hydrogen power
Peter Hargreaves is also a long-term backer of ITM Power, the hydrogen energy company where diy investor (uk) made an excellently timed purchase last summer.
Hargreaves joined its board in 2004 and had some 5m shares when ITM Power joined AIM the following year at 50p per share. Its price soared to over 350p in 2006 but then collapsed to 15p by early 2009.
Hargreaves has taken part in various fundraisings in recent years and now owns 28.6m ITM Power shares, which is a 6% stake worth £70m.
With both his holdings in Hargreaves Lansdown and ITM Power, Peter Hargreaves has taken the long-term view, rarely selling and reaping the rewards.
Setting up Blue Whale
Hargreaves invested £25m into the Blue Whale Growth Fund when it launched, which would now be worth £41m. And it looks like he may have invested another £40m or so earlier this year, assuming he does indeed account for a quarter of all units held.
As mentioned earlier, Hargreaves first met Yiu when he worked at Hargreaves Lansdown.
Yiu left the Bristol-based investment firm after 5 years in 2007 and he then worked at New Star for 2 years, Artemis for 4 years, and hedge fund Nevsky Capital for 2 years.
Yiu directly managed or co-managed Artemis UK Growth Fund (now Artemis UK Select Fund), Artemis Pan-European Hedge Fund, and New Star UK Gemini Hedge Fund.
Nevsky closed down in 2015 — its co-founder Martin Taylor said he thought its past returns couldn’t be repeated. At that point, it had made 18.5% a year, after fees, for just over 15 years.
Yiu turns 42 in July and from their LinkedIn profiles I’m guessing his team of 4 other investment professionals are mostly younger than him.
Daniel Allcock, listed as Yiu’s co-manager, is probably in his early 30s and worked with him at Nevsky Capital.
Returns
Here’s how Blue Whale has done since launch and so far in 2020:
| Fund/trust | 11 Sep 17 to 26 Jun 20 | YTD |
|---|---|---|
| Blue Whale Growth | +64.6% | +15.4% |
| Fundsmith Equity | +45.7% | +7.8% |
| Lindsell Train Global | +45.6% | +3.8% |
| Scottish Mortgage | +92.2% | +40.6% |
| Vanguard Global A/C | +19.7% | -1.7% |
Regular readers will know that I’m a big fan of Fundsmith and Lindsell Train, and hold them both in my portfolio.
While they have doubled your bog-standard global tracker since September 2017, Blue Whale has more than trebled it, due to its greater weighting towards technology stocks.
Scottish Mortgage’s performance, rocket-fuelled by its supersize positions in Tesla and Amazon, is just ridiculous but Blue Whale was within touching distance of it as recently as mid-April.
Blue Whale often runs with a fairly large cash position. This can dent returns when markets are rising but it allows for opportunistic purchases when large falls occur.
Although it had a small cash balance of 3% at the end of 2017, it held nearly 15% in cash at the end of 2018.
It still held 11% as of 31 January 2020, just prior to the coronavirus crash, due to its “strict valuation discipline”. But as share prices fell, and it saw valuations as becoming more attractive, this cash was put to work.
The cash balance was back to 3% by 31 March 2020 and was 4% at the end of May.
The #1 global fund
Blue Whale measures itself against the Investment Association’s Global Sector rather than a global index like MSCI World. Its stated aim is to be “the #1 performing global fund”.
Yiu has set himself a tough target, to put it mildly, so as Blue Whale approaches its third birthday it’s worth seeing how it’s done so far.
Looking at the latest three-year tables, Baillie Gifford Long Term Global Growth fund — basically Scottish Mortgage minus its unquoted holdings — would seem to be in pole position at the moment.
Baillie Gifford’s Positive Change and Global Discovery funds aren’t too far behind, but Blue Whale should be in the mix, too.
Investment approach
Like Fundsmith and Lindsell Train, Blue Whale usually has around a couple of dozen high-quality businesses in its portfolio.
But it seems to take a much more active approach at buying and selling, based on company valuations, driven by its “internal financial modelling and proprietary valuation metrics”.
Blue Whale favours large companies (with market caps in excess of £100bn), with over 70% of its current portfolio listed in the US and 20% in Europe/UK.
Technology is by far the biggest sector (62%), followed by Healthcare (13%), and Consumer Staples (9%).
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Certain industries, such as banking, appear to sector non grata. And biotech and pharmaceuticals appear to be off-limits, too, as they require too much sector expertise. But traditional cyclical businesses might be entertained, should their valuations be deemed attractive enough.
Peter Hargreaves and Stephen Yiu both post occasional commentaries and Blue Whale TV has some useful information.
There are three in-depth interviews at PI World as well.
Portfolio
Apart from its newness, one of the things that has kept me from buying Blue Whale so far is the fact that it seems to trade in and out of positions fairly frequently.
All else being equal, I think lower portfolio turnover usually ends up delivering better performance. But there are always exceptions.
Yiu has been quoted as saying that he wants to outperform over any 12-month period and this is the reason for its more active stance.
As with many open-ended funds, full accounts listing all the positions held are rather slow to appear.
The 2019 version was only published in the last couple of weeks but it provides lots of clues as to how active Blue Whale has been.
| Company/ETF | 31 Dec 19 % | 30 Jun 19 % | 31 Dec 18 % |
|---|---|---|---|
| Microsoft | 8.2 | 7.8 | 7.6 |
| World ETF | 8.2 | – | – |
| Adobe | 6.6 | 5.5 | 6.7 |
| Visa | 5.9 | 2.1 | 3.3 |
| Autodesk | 5.7 | 4.1 | – |
| 5.3 | 2.5 | 2.3 | |
| Mastercard | 5.3 | 3.4 | – |
| Boston Scientific | 4.8 | – | – |
| Intuit | 4.7 | 2.1 | – |
| Wyndham Hotels | 4.5 | 4.0 | 2.7 |
| Alphabet | 3.3 | 3.2 | 5.3 |
| Dassault Systemes | 3.2 | – | – |
| Unilever | 3.1 | – | 0.5 |
| ANSYS | 2.9 | 3.9 | 2.7 |
| LVMH | 2.7 | – | – |
| Paypal | 2.6 | 3.5 | 3.1 |
| Verisk Analytics | 2.5 | 1.5 | – |
| Salesforce | 2.2 | 3.8 | 7.3 |
| Diageo | 2.1 | – | – |
| Amazon.com | 1.6 | 3.9 | 6.4 |
| Masimo | 1.4 | – | – |
| Campari | 1.3 | – | – |
| InterContinental Hotels | 1.0 | 2.1 | 1.9 |
| Consumer Staples ETFs | 0.9 | 5.1 | 7.7 |
| Veeva Systems | – | 5.4 | 4.8 |
| Smith & Nephew | – | 3.8 | 3.3 |
| Healthcare ETF | – | 2.9 | – |
| Marriott | – | 2.8 | – |
| Cisco | – | 2.7 | 3.8 |
| Adidas | – | 2.6 | 3.9 |
| Guidewire | – | 2.3 | 4.2 |
| Black Knight | – | 1.7 | – |
| United Health | – | 1.4 | 3.7 |
| Estee Lauder | – | 1.0 | – |
| Waters | – | 0.8 | 1.2 |
| SAP | – | 0.6 | 1.0 |
| Tencent | – | – | 1.5 |
| Altria | – | – | 0.7 |
| Cash | 10.0 | 13.6 | 14.6 |
| Total | 100.0 | 100.0 | 100.0 |
There’s plenty of activity going on here!
10 positions, worth 28% of the portfolio as of 30 June 2019, had been sold just six months later.
And 11 out of 24 positions held as of 31 December 2019 weren’t in the portfolio a year earlier. Yiu said in a recent Investors Chronicle article that he only expects to buy and sell five positions a year, but Blue Whale has recently been a lot more active than this.
The use of ETFs, both for global indices and for sectors, was a bit of a surprise to me. I hadn’t seen these listed in the top 10 holdings in the monthly factsheets, but the totals I have listed above for these positions are often split into different currencies or regions.
The 2019 annual report provides a little commentary:
- the aggregated forward earnings for the portfolio rose by 18% in 2019 whereas the figure was 6% for the MSCI World index;
- software remains a large weighting as Blue Whale still thinks this sector is being undervalued by the market;
- Mastercard and Visa were increased due to increased confidence in the durability of their business models; and
- Adidas and Veeva were sold due to perceived overvaluation and Smith & Nephew was disposed of after a reassessment of its management following the departure of its CEO.
The annual report also gives another indication of the volume of trading. Purchases were £212m and sales were £107m. This compares to opening assets of £80m and closing assets of £224m.
The transaction charges this level of trading incurs doesn’t seem to be too excessive. In 2019, trading costs came to £225,000, equal to 0.15% of average assets for the year.
And the average dealing spread of the shares held by Blue Whale was just 0.06%.
What’s happened in 2020?
The top 10 has changed again in 2020 of course.
Unfortunately, neither individual weightings nor position rankings are revealed on a monthly basis.
But, as of 31 May 2020, 6 of the top 10 were also in the top 10 as of 31 December 2019 (namely Adobe, Autodesk, Boston Scientific, Mastercard, Microsoft, and Visa).
The remaining 4 — Amazon, Dassault Systemes, PayPal and Unilever — were all in the portfolio at the end of 2019.
And we also know that 6 of the current top 10 have been in the portfolio pretty much since the fund launched almost three years ago.
Autodesk and Visa were added in March 2018 while Boston Scientific and Dassault joined during the summer of 2019.
According to Wealth Manager, Yiu is wary of potential value traps that might not recover that quickly as lockdowns are lifted. He’s highlighted Starbucks and ITV as examples.
He’s also sold out of Intercontinental Hotels and LVMH this year, topping up on the likes of Amazon, PayPal and Microsoft.
Charges
Blue Whale Growth Fund offers I and R class units (institutional and retail), both of which offer income and accumulation alternatives.
Larger platforms, such as Hargreaves Lansdown, seem to offer the I units. These have an ongoing charge of 0.89%.
Smaller platforms, such as iWeb, only give you access to the Rs, which have a slightly higher ongoing charge of 1.14%.
The basic management charge is 0.75% for the I units and 1.0% for the Rs. So, in both cases, other operating costs add an extra 0.14%.
It’s not cheap, but not too outlandish for a £400m fund. However, from what press coverage I have read in recent months, it seems unlikely that the percentage charge will come down that much should Blue Whale grow significantly in size.
Fundsmith has taken that same approach, sticking with its 0.90% management charge (its total charge being 0.95%).
Lindsell Train, on the other hand, seems to be a lot better at reducing its charges as its assets swell in size — it charges just 0.45% for its cheapest units (0.5% total ongoing charge).
Skin in the game
Again, there’s not a lot of information to go on here.
The annual report only lists unitholders over 20% and there is only one of them: Hargreaves Lansdown Nominees, whose stake fell from 84% at the end of 2018 to 59% at the end of 2019. Presumably, this includes Peter Hargreaves’ personal stake.
It’s not clear how much Yiu and his team have invested, although you would expect Yiu stands to make more from his involvement in Blue Whale Capital LLP, the partnership that runs the fund.
The exact partnership split between Yiu and Hargreaves isn’t disclosed but Hargreaves is noted as the controlling party.
In the year ended March 2019, the partnership lost £0.3m on fees of £0.6m.
But the fund has grown rapidly since then. On assets of £400m, with around of three-quarters of units in the cheaper I shares, Blue Whale should now be generating fees at the run rate of £3.2m a year.
That’s a fair way behind the £200m or so that Fundsmith is probably generating on its total assets of £22bn from Fundsmith Equity, Fundsmith Emerging Markets, and Smithson, but it shows what’s possible.
In summary
Blue Whale’s performance has been highly impressive to date. However, it’s difficult to know how much of its lead over Fundsmith and Lindsell Train is down to a greater weighting in technology and how much comes from its more active trading approach.
Lindsell Train’s funds rarely seem to trade at all, with maybe one new position a year, if that. Fundsmith is a little more active, but not massively so.
In terms of duplicate holdings, the overlap isn’t too extreme.
At the end of 2019, I think all three funds had just four holdings in common: PayPal, Intuit, Diageo, and Unilever.
Microsoft, Facebook, and Visa were held by both Fundsmith and Blue Whale but I don’t think there was any additional overlap between Lindsell Train Global and Blue Whale.
Stephen Yiu is definitely putting in the legwork to get the Blue Whale name out there. Some people may be a little uncomfortable with that, considering how star names like Woodford and Darwall have become unstuck.
Personally, I like managers of open-ended funds to have extra visibility like this, given it’s so much harder to get up-to-date and detailed information on them compared to investment trusts.
Fundsmith hit the headlines last week after it was revealed it’s launching a private Cayman Islands fund that may short some stocks, raising ‘style drift’ concerns. I’m watchful rather than alarmed at this point, but it’s definitely increased the likelihood I’ll be investing in Blue Whale.
And the fact that Yiu is some two decades younger than Smith, Train, and Lindsell, so succession concerns are less of a concern, is another plus point.
Disclaimer
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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Thank you for this insightful article. Stephen Yiu has expressed an interest in launching an investment trust soon in this interview (https://youtu.be/–REkmEGsMo), so hopefully we’ll see a closed-ended version soon.
Thanks for that Rhydian. I missed that completely when looking down the list of videos on Blue Whale TV.
Definitely welcome news, although it does sound like it is still a little way off.
Thanks for the new article, always a pleasure to read.
A bit of an off topic: do you know of any other investment trusts similar to RIT Capital Partners? Similar in the sense that is global and diversified over multiple asset types (not only equities but PE, Hedge Funds, etc).
I suspect Caledonia and Tetragon are probably the closest.
It might be worth looking through the Flexible sector to see what catches your eye, though. I did a quick overview piece here: https://www.itinvestor.co.uk/2019/11/flexible-friends/ but I think you’d probably need to look at their latest monthly/quarterly factsheets for a better feel.
I’ve never really looked at the AIC’s hedge fund sector, but the BH Macro & Global funds and Pershing Square seem to have their fans.
Yes you’re right – having listened to the interview again, it seems launching a trust is more of an aspiration rather than anything concrete.
It’s a sign of their ambition that they already have an investment team of five to run a relatively small fund. They obviously envisage it growing into a multi-billion pound vehicle.
Interesting article. Thanks.
It is indeed strange that Blue Whale have not pushed forward with an Investment Trust particularly after the WEIF debacle in 2019 where there is now an uneasy feeling about Open Ended Funds and their ability to deal with outflows in a downturn in a poor trading environment. Lansdown Hargreaves were criticised in the Woodford debacle where there was evidence that the Woodford Fund was on the Best Buy list at LH right up to the suspension of the Fund by the Authorised Corporate Director. An Investment Trust gives an extra layer of Independent Director protection to investors that Open Ended Funds don’t have.
Thanks Ray.
I think the concern with open-ended funds is mostly limited to those with illiquid holdings – such as the large unquoted stakes that Woodford held, commercial property, or where a fund owns a large percentage of an individual company’s shares (although that can be an issue for investment trusts as well). However, with the size of companies that Blue Whale is investing in, selling any of its positions should be very easy.
I continue to wrestle with Blue Whale. I am keen to find a fund that is more US and tech-tilted than Fundsmith and Lindsell Train, and Blue Whale seems a good candidate.
But some question marks remain. I’m not crazy about the turnover – it’s hard to see evidence that they’re any good at it. It’s laudable to want to be #1, but I’d prefer it to be backed up with a more set-in-stone investment philosophy.
Finally, arguably the obvious benchmark is the NASDAQ 100, and it has failed to beat this. Perhaps this is because NASDAQ is in a colossal bubble!
On the other hand, the portfolio is full of very high quality companies – I like the fact that many of the holdings are shared with Findlay Park, who are one of my benchmarks for US quality.
While the ‘Baillie Gifford style’ has shot the lights out this year, I’m still a little sceptical of the valuations. I’m sure there are one or two future Amazons in there, but I suspect there are more Pets.com. And a good business (as it’s becoming clearer that companies like Shopify are going forward) is not necessarily a good investment. Or to put it another way, I’m not convinced of the sustainability of the earnings and share price gains.
In addition, my experience has been that joint ventures like Blue Whale tend to not work – it’s good that Yiu has a stake, but it’s still not really ‘his’. Hargreave is in charge, and I note that Hargreave’s son is in charge of the PR/Marketing, which could be a positive or a negative depending on further facts.
If I’m honest, I think overall I consider Blue Whale as an ETF proxy – it’s quite useful to provide exposure to quality large-cap US tech, in the absence of a great fund where one really has total faith in the alignment and fiduciary duty of the managers. I suppose I still view Manchester & London similarly, though with added liquidity issues.
Good spot re: Hargreaves Jnr, Tom. I hadn’t really thought of it as a JV to be honest. My impression is that Hargreaves is hands-off when it comes to the day-to-day stuff. I think he is 73 and obviously has a number of other plates to spin.
Shopify has been an amazing story – just over $40 as recently as the end of 2016 and I think it touched $1,000 earlier today. But that makes the valuation $120bn versus forecast sales of $2.2bn for 2020!
Although I’m still kicking myself about not buying some dedicated biotech and tech over the last year or two, I share that fear of jumping in at a bad moment.
I think 5 BG funds and 4 BG trusts have returned more than 30% this year – that’s out of a total of 34 equity funds and trusts.
Having recently found this blog, have enjoyed reading back many of the posts. On the global front I had chance recently to review my global fund exposure (moving from HL to II I had to sell my LTG as II don’t do the same fund class as II). I had a look around and have taken a punt on T.Rowe Global Focused due it is top performance. I heavy in BG through SMT and Positive Change so wanted an alternative. It has even been beating Bluewhale, plus the fees are at bit smaller which always help. I like the look of the core holding, and how they talk about how they built a covid playbook at the beginning of the year and positioned the portfolio to be a good place during a large scale outbreak.
Hi IT Investor, many thanks for your write up – can you just show where you found their annual report? Will be interesting to track their holdings over time
Hi Jack. I kind of stumbled across it, if memory serves, on the Link Fund Solutions website: https://www.linkfundsolutions.co.uk/541.cshtml
If you scroll down to the ‘Select Fund Group’ drop-down menu you should see it listed under ‘LF Blue Whale’