This month we are celebrating 6 years of the LF Blue Whale Growth Fund. I would like to take this opportunity to thank you for your support through these early years of Blue Whale. It takes no small amount of bravery to back a new fund, especially one set up by an entirely new company. We are determined to reward you for your support, committing ourselves in our mission to deliver significant outperformance for our investors.
On each anniversary we like to look back over the lifespan of Blue Whale and explain how that journey has impacted where the Fund sits today.
In September 2017, the portfolio was designed with a simple mantra – invest in high quality businesses at attractive prices. Prior to launching the Fund, we had committed to extensive research into possible investee companies, with our investment team doing proprietary research.
Six years of upheaval
The Fund was established in the midst of the United Kingdom’s negotiations to leave the European Union and with a newly elected and divisive President in Donald Trump. Quickly, other problems became evident – a developing US/China trade war, questionable monetary policy in the US, a global pandemic and a war in Ukraine to name but a few. Political upheaval both in the UK and abroad has been a feature of the past six years; the Fund having seen four Prime Ministers and one of the most acrimonious Presidential elections in history. The political landscape in the US only becomes more divided.
In late 2021/early 2022 the combination of all these elements led to a massive correction in the stock market, with prices down across the board – energy being the only positive sector during this period.
Given that our first four years to September 2021 saw no shortage of potential pitfalls for investors, we were pleased to have delivered a return of 114%* (from 11/09/17 – 31/08/21), vs the IA Global Sector of just 55%, thereby more than doubling our benchmark’s performance. Investors should note that no references to past performance in this review should be seen as a guide to future performance.
Portfolio change and adaptation
Delivering this level of performance was not easy – we kept a constant eye on our portfolio companies and made changes where we saw fit, be that due to valuation, global trends, or structural changes to their businesses.
The overarching theme that drove returns through the first few years was that of digital transformation. And whilst we actively managed our holdings, we remained loyal to this key theme.
But in mid-late 2021 we felt more radical changes to the portfolio were necessary. Seeing the inflationary environment driven by the world’s response to Covid-19 and evidence that many structural changes in the world of digital transformation had accelerated during the pandemic, we saw a lack of upside potential in many of our once favoured companies. This prompted a move to sell a number of holdings, with companies such as our FAANG holdings dropping out of the portfolio altogether. This proved to be a shrewd call, considering the rapid sell-off in these businesses that commenced in the early months of 2022. However, selling these companies did not protect us sufficiently against the contagion of the share price downgrades in the “tech” sector. We continued to hold big tech names such as Microsoft and Nvidia through this volatile period in the belief that their businesses would weather the storm due to their superior quality; we were mistaken.
We are pleased to report that the quality eventually shone through for these businesses as Microsoft and Nvidia have both since exceeded their pre-sell-off highs – Nvidia is up more than 200% this year alone.
Reacting to the developing structural shifts in the global economy – notably inflation and higher interest rates – we looked to new sectors for Blue Whale to deliver growth potential. Our research extended to railways, energy companies and select financials to see if we could derive the level of quality we require in sectors that we see as beneficiaries of the post-pandemic, post-Ukraine invasion world.
Six months of poor performance
Despite our best efforts, the portfolio suffered six months of poor performance at the start of 2022.
Growth-orientated businesses sold off in their droves, in favour of “value” propositions that were considered a “safe haven” given the uncertain economic backdrop. It should be noted, however, that these value propositions were still not positive performers, instead showing more modest losses compared to their growth-orientated counterparts.
Lessons were learned during this period and the experience of such a sell-off has strengthened our investment team.
A surprisingly good year
Halfway through 2022 the sell-off tapered, but the damage had been done. Geopolitical tensions around Russia’s invasion of Ukraine and Chinese sabre rattling meant investors adopted a “wait and see” approach to re-entering the stock market. In addition, interest rate rises now meant investors had a safer alternative when it came to asset allocation, with money market investments offering the most attractive returns for nearly 20 years.
Despite this, however, the appetite for investment gradually picked up in the latter half of 2022 and continued apace in 2023. Whilst the news remained bleak, investors were keen to seek out those pockets of opportunity where they could hopefully derive a better return for their capital given cash deposits were now being eroded at the fastest rate for over 40 years.
The bad news peddled by the press would have had you believe opportunity for investors continued to look stark, but from the end of June 2022 to end of August of this year, the Fund* delivered performance of 25.6% vs the IA Global average of 11.1%.
2023 and beyond
Despite an incredibly tough six years, we are pleased to report our investment mantra has not changed – we continue to invest in high quality businesses at attractive prices. Our commitment to an extremely well-resourced investment team continues with six analysts and counting.
Whilst the general thesis behind what makes a great investment for the portfolio remains the same, the process to identify these companies has evolved. Our increased coverage through investment in our analysts helps us to find exciting new businesses in a variety of sectors which we hope will drive outperformance in the portfolio.
Growth in 2023 has been driven largely by the AI (Artificial Intelligence) revolution. As businesses across the board adopt this game-changing technology, we believe this area has the potential to continue to drive growth over the medium to long term.
Other themes in the Fund look to stabilise the portfolio against possible volatility from continued geopolitical tensions and inflation and interest rate concerns. Our investment into railways and our backing of payment systems have provided resilience in those months where unwelcome news and monetary policy updates have caused dips in the market.
It is true the Fund has yet to reach its post-sell-off highs, but the trajectory for recovery remains positive.
Matching ourselves against our competitors in the IA Global sector drives our competitive nature. Outperformance is and will always be our key marker for success in the Fund – indeed “significant outperformance” is what we strive to achieve.
To that end, in spite of a tough period at the start of 2022, we are pleased to report the Fund has delivered, what we believe to be, five and a half years of pleasing returns. From inception in September 2017 to the end of August 2023, we have delivered a return of 90.5%*, vs the IA Global average of 54.6% - an outperformance of 35.9%.Please, follow this link for detailed performance information.
The world is constantly changing. Our dynamic, research-led approach should give us scope to continue to drive outperformance for the Fund. Most pleasing for me, as manager of the LF Blue Whale Growth Fund, is to see a team around me hungrier and more dedicated than ever before. We welcome the challenges of the next six years and hopefully many more after that.
*LF Blue Whale Growth Fund I Acc
This communication is issued by Blue Whale Capital LLP which is authorised and regulated by the Financial Conduct Authority. Your capital is at risk. If you cannot afford the potential risk of a substantial loss, you should not invest. Equity investment should be viewed as a long-term investment. Past performance is not a guide to future performance. The value of investments may fall as well as rise and you may not get back the amount of your original investment. Prospective investors should study the Fund’s Prospectus, KIID and application form which together provide a complete list of risk factors. Blue Whale does not give investment advice. If you are unsure if the Fund is suitable for you, you should contact a financial adviser. Views we express on companies do not constitute Investment Recommendations and must not be viewed as such.
