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Investment Manager's Report.
by Stephen Yiu

18 Jul 2018



The Fund was launched in September 2017. The strategy of the Fund is to invest in a concentrated portfolio of 25-35 equities from across the globe utilising a detailed bottom-up research process, unconstrained by sector allocations. We aim to invest in companies which have the ability to grow profitably over time which are undervalued by the market. We pay particular attention to the development of new technology and look to avoid investing in companies that may face structural issues with their business models as a result.


Market Commentary

The Fund outperformed what is perhaps the most obvious benchmark – the MSCI World Net GBP Index – by over 10%1 in the first half of 2018. It outperformed the FTSE 100 Index, which is relevant to many of our UK investors, by more than 11%1.

The first half of the year saw high levels of market volatility in February, March and April with the “VIX” volatility index spiking to over 35, a level last seen in the middle of the Eurozone crisis in 2015. This caused market-wide turbulence during which our Fund showed strong resilience. From the 15th January through to the 20th February, the FTSE 100 Index declined more than 6%1 and the MSCI World Net GBP Index declined by more than 4%1 whilst our Fund declined less than 1%. We believe the volatility seen in the first half of year was partially driven by technical factors and that financial conditions remain supportive of continued global economic growth in the second half of 2018. Donald Trump’s ongoing actions on global trade arrangements have yet to materialise into an adverse market event. In addition, despite the continued rise of populism in Europe courtesy of the election of the Lega Nord and Five Star Party in Italy, we believe the European Central Bank will refrain from tightening monetary policy anytime soon, which will help support growth in the Eurozone. We still believe the main risk to markets is that the US Federal Reserve raises interest rates too quickly – the flattening yield curve should be a signal to policy makers that further rate rises need to be very gradual. We continue to watch this situation closely.

The main contributors to our performance in the first half of 2018 were the large-cap technology stocks. Current holdings Alphabet, Intuit, Microsoft, Amazon, Adobe, Salesforce, Facebook, PayPal and MasterCard all delivered returns well in excess of the indices referenced above. This was due to strong earnings growth which exceeded the expectations of market participants together with rising expectations for future performance. We believe the market continues to undervalue these companies that can achieve high long-term sustainable growth.

We did exit our investment in technology stock Red Hat during the first half of the year as we felt that valuation had run too far ahead of fundamentals. Subsequent to our sale, Red Hat suffered a one-day decline of more than 20% in June after disappointing earnings results, justifying our decision.

We also exited our holdings of gaming companies Electronic Arts and Activision Blizzard. The overnight success of the free-to-download hit game Fortnite cast some doubt on our long-term thesis on these stocks, which depends on the willingness of gamers to pay to download games. These stocks have since performed well and Electronic Arts continues to generate excitement with their drive towards a subscription model, but we are content that our risk-reward analysis was correct.

Elsewhere, healthcare stocks UnitedHealth Group and Zoetis also delivered strong first half returns for our Fund. UnitedHealth Group continues to deliver double-digit earnings growth as their strategy to vertically consolidate the US healthcare chain continues to pay off. Zoetis continues to benefit from strong structural tailwinds in the animal health industry and have recently entered the fast-growing animal diagnostics market through their acquisition of Abaxis.

In summary, we are very pleased with the performance of the Fund since inception and remain optimistic about the future growth prospects.


1 Source: Bloomberg. The indices are used by the Investment Manager for comparison. No benchmark is required to be disclosed per the Prospectus. Please remember that past performance is not a guide to future performance and that your capital is at risk. Please note also that references to portfolio companies do not constitute investment recommendations.


Blue Whale Capital LLP

Investment Manager

18 July 2018




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