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Where we see opportunity after COVID.
by Stephen Yiu

07 Jul 2020

 

When we launched the Blue Whale Growth Fund in 2017 – long before the notion that pandemics could become a material impediment to global growth – the investment team and I set out simply to find high quality companies which would contribute to consistent significant outperformance.

I am happy to report that during the March sell-off and the subsequent stock market rebound, our strategy has withstood its toughest test yet.

Looking ahead, we aim to continue investing in high quality businesses with a strict valuation discipline. Among these, we highlight two types of companies where we see opportunity:

Lockdown Survivors

With lockdown easing globally, many companies in industries that suffered under lockdown are embracing the current re-opening.

Among these are companies where foregone revenues during lockdown are lost forever – such as hotels and restaurants. In contrast to these are companies which were not immune to the effects of lockdown, with a slow-down in the sale of products and services, but whose demand is pent up with revenues being delayed, not lost.

Medical device companies, such as Boston Scientific, are an excellent example. Often, they are involved in procedures like cancer-related endoscopy, heart surgery or chronic illnesses, which, though classified as “elective”, are by no means optional. These are the companies we prefer in a recovery.

Beneficiaries of accelerated adoption

Many of the sectors we invest in benefit from strong and sustained secular growth, some of which have accelerated during lockdown.

Benefiting from changes in consumer habits are sectors like eCommerce and Payments where COVID has been a catalyst for accelerated adoption of contactless and online payments – benefitting companies such as PayPal and VISA. Even considering the boost provided by COVID, these segments of the market still have a long runway of growth ahead of them.

Enterprise demand has also progressed, with recent experiences highlighting the increased need for digital transformation, be it for productivity software that better enables working from home (such as Adobe’s Creative Cloud) or the Cloud architecture that powers both the software and the ease of digital collaboration – Amazon’s AWS.

Of particular interest in this area is Microsoft, which not only offer their omnipresent digital Office – enabling the new obligatory trends and requirements for working-from-home – but also, their Azure cloud service powering and platforming other apps and services operating in this field.

Satya Nadella, CEO of Microsoft (a top 10 holding since launch) described in April seeing “two years’ worth of digital transformation happening in two months” among their enterprise customers. From our investment team’s research, we are still only at the beginning of a long, sustained journey in enterprise digital transformation.

In the above examples of where we see opportunity, we are identifying companies and sectors that we have appreciated for some time. Although the quality of a business does not change rapidly, stock markets can be capricious, as Peter pointed out. 

The danger, especially as our fund enjoys peer-beating performance, is to unquestioningly stick with the status quo, resting on our laurels, and failing to adapt to changing times.

We know we cannot afford to be complacent and will continue to exercise rigorous valuation discipline while honing our approach with a view to continuing to achieve our aim of delivering consistent significant outperformance.

 

 

 

 

Please note that the information provided in this article is not to be construed as advice and any views we express on holdings do not constitute investment recommendations and must not be viewed as such. If you are unsure as to the suitability of an investment for your circumstances, please seek independent financial advice. Investments can go down in value as well as up so you may get back less than you invested. Your capital is at risk. Past performance is not a guide to future performance.

 

 


 

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