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A portfolio that transcends elections - How Blue Whale manages country exposure.
by Stephen Yiu

05 Nov 2020

 

As the votes are being counted for the US Presidential election, many investors are asking what this will mean for the US stock market.  

At Blue Whale our focus is, and always will be, the quality of the companies within our portfolio. We believe that great companies should transcend the outcome of elections and we therefore only invest where we believe this to be the case. 

But as we invest on a global basis, we have to keep an eye on the macro environment as well. Should we see the potential outcome of any election as being detrimental to our portfolio holdings, we will act accordingly. Investing globally gives us this freedom, but it does come with challenges, which I explain below. 

 

Why we Invest Globally 

When Peter and I co-founded Blue Whale Capital, we wanted our flagship fund to have a global mandate. Peter was keen on offering UK savers and pensioners a fund that invests beyond just the UK stock market while I wanted to consistently seek the best opportunities for investor returns without being constrained by geography. 

A question we’ve been asked recently was how we might deal with our US exposure given the uncertainty from the upcoming, potentially tumultuous, presidential elections.  

In this article, we outline how we view country exposure and discuss how we manage it. 

 

How Blue Whale Views and Manages Country Exposure 

One of the great joys of running a global fund is that the world is truly our oyster. There are certain hurdles that any good global investor must overcome – differences in language, currencies, time zones, and accounting standards – but country exposure is an issue that is perhaps more complex than might first appear.  

Take Unilever for instance, even though the company is listed in the UK and the Netherlands, with most of its brands being European or American, the majority of revenue contribution – and revenue growth – comes from Asia. The same goes for other consumer staples companies and many luxury goods brands. 

 

How do we determine country allocations for the fund?  

For an active fund, the right place to determine country exposure is at the business level: what makes a company outperform are its growing revenues and cash flows, not necessarily where it’s listed. 

We do this by selecting companies based on their own merit, using our independent, bottom-up research and applying a strict valuation discipline. We do not operate any rigid geographical allocation framework or trade based on geopolitical views.  

Whenever we add a new stock to our portfolio, we ask ourselves two questions relating to its geography: from what countries or regions does the company generate the majority of its revenues, and could this company outperform its peers and the broader global market in an economic downturn?  

 

Investing in the best the world has to offer  

For the majority of our portfolio, the companies we hold have global demand for their products and services while their business models make them more resilient to economic downturns. For example, Adobe Photoshop is the number one photo editing software in almost every country it operates in. What is more, it has a diversified geographic presence in terms of revenues and therefore faces less individual country exposure than, for example, Apple, which is heavily exposed to China for its sales growth as well as for its supply chain. 

Adding to the resilience of companies like Adobe is their position as a provider of key tools and services in the running and continuation of business activity – especially where employees and freelancers are required to work from home. In a downturn, creative professionals would probably rather live on Pot Noodles than cancel their Adobe subscriptions! 

 

How do we manage our US exposure? 

We are not concerned by the impact of elections on our US holdings.  

Although our portfolio is about two-thirds invested in US-listed companies, our underlying economic exposure is less than 50%. This is because global companies like Adobe, Microsoft and Visa have about 50% of their revenues coming from the US while being 100% listed in New York.  

Additionally, due to their high quality business models, the growth trajectories for their earnings and cash flows are largely unaffected by national politics, whether it be the ongoing negotiations around a transition deal between the UK and the EU due in December or the US elections in November.  

Whatever happens once the votes are fully counted, for us, one thing is certain -  Adobe Photoshop will still be used to smooth out Donald Trump and Joe Biden’s wrinkles!  

 

This is a continuing part of our ongoing series on How We Invest at Blue Whale. In part 1 we talk about the companies we avoid, in part 2 we talk about what we look for in a company, in part 3 we talk about our tech exposure, and part 4 is about valuation.  

 

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.