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Where do revenues actually come from? Blue Whale’s guide to Sector Diversification.
by Stephen Yiu

02 Aug 2021


At Blue Whale, we pride ourselves in the depth of our research and our investment team’s ability to translate insights into fund performance.

Here we offer a sneak peek into our research process to help our investors understand what fund managers do in an otherwise opaque industry.

When we look at a company, we always analyse three things: who they sell to (the customers), what they sell (the product), and how they sell it (the business model). These three things help us assess the company’s ability to outperform the market.

In this article, we focus on understanding where a company delivers value to truly appreciate its underlying economic exposure and understand its impact on portfolio sector diversification.

Follow the Money – where do revenues come from?

Most standard sector classifications are based on what a company sells. Amazon operates an online retailer so it’s often classified along with Walmart as a retailer. Adobe sells software so it’s classified with Microsoft as a tech business.

While this represents a quick way of approximating a company’s sector exposure, we find it less helpful for understanding the true economic exposures behind a company’s performance.

Take Adobe for instance. Adobe’s main customers are creative professionals in the media and entertainment space which exposes the company’s fortunes to video editing, photo editing, online marketing and online advertising. This ties its fate to the producers of content and the platforms through which they’re distributed. That’s why we classify Adobe under Media and Entertainment along with Disney, Netflix, Youtube and Facebook: it’s the demand for digital content that’s driving Adobe’s performance.

Autodesk, on the other hand, sells software mainly to the construction, industrial and manufacturing industries. This makes its underlying economic exposure closer to housebuilders like Ashtead, construction companies like Balfour Beatty, their cement and aggregates suppliers, as well as manufacturing giants like Siemens and Philips. That’s why we prefer to classify Autodesk with Industrials companies: it’s the digitisation of construction and industrials processes that’s driving Autodesk’s growth.

Furthermore, companies like Visa and Mastercard, which are often classified as tech companies but whose clients are mainly banks and other financial institutions, are clearly more exposed to the banking and payment industries. That’s why we prefer to classify Visa and Mastercard as Financial Services rather than Software.

Applying this at the portfolio level helps us better understand the true level of diversification from our collection of companies. We see for instance that almost half of the portfolio is exposed to financial services/payments and media & entertainment, something that’s not immediately observable from standard industry classifications.



A similar exercise can be made when looking at our portfolio’s geographic exposure. Although many of the companies we own are listed in the US (about 70% of our portfolio), almost all are large global companies generating revenues in Europe and Asia (often 40% or more), just like many companies listed on the FTSE 100 Index. Taking this x-ray view of where revenues come from, we can see that our portfolio’s underlying exposure is very well diversified globally.



We believe that doing this helps investors better understand the true level of portfolio concentration risk in any one sector as well as providing a deeper understanding of the key drivers behind portfolio performance. We invite all investors to take a deeper look at their own portfolios and to ask their fund managers to report on their underlying exposures – the results might surprise you!


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.