‘Alpha’ is investment jargon which means ‘performance above that of the benchmark’. Quite simply, Alpha is what you want to achieve from your investment, especially if you are paying a manager to actively manage a portfolio of investments for you.
Sadly, however, it is not always the case that active managers outperform their benchmark. Many people have seen their investments perform in line with the benchmark, or even below and investors often miss this lack of outperformance when the market is doing well because the value of their investments is still going up. A good investment manager should never be happy with the average returns of the benchmark – especially as they are being paid to provide outperformance.
So what do we do at Blue Whale to hopefully achieve real outperformance?
- We run a high-conviction portfolio of around 25-30 stocks at any given time. This means that our returns are not averaged out by holding vast numbers of investments, and each investment is able to make a real difference to performance within the fund.
- We are company focused. We look for companies with the potential to grow and improve profitability over the long-term and we invest when the market underappreciates this potential.
- We are free to roam all corners of the Earth in search of these companies. This will allow us to search out opportunities from a greater pool of potential constituent investments.
- Our approach does not force us into certain sectors. Many active managers employ an investment strategy that results in them being persistently overweight in certain sectors and industries. We believe that active managers should not be trapped by investment in specific sectors, as passive investments such as tracker funds and ETFs are a perfectly efficient way of gaining exposure to specific areas of potential growth. In addition, when these sectors eventually become unattractive for investment, these managers will struggle, or simply be unable to reposition their portfolio.
Finally, we wish not to follow the crowd, but hopefully have the crowd follow us. A key pillar of our investment philosophy is that we believe outsized returns are driven by a change in market sentiment. In order to benefit from that change, we must be ahead of the curve. Simply following where others have already been means you are late to the table, only able to snack on the slim pickings of investment performance. Being ahead of the herd always means the largest bites out of the tastiest morsels – and there is nothing more ‘alpha’ than that!