Blue Whale Capital LLP ("Blue Whale") is authorised by the Financial Conduct Authority ("FCA") as a Markets in Financial Instruments Directive ("MiFID") firm. It is therefore subject to: SYSC 19C: The FCA BIPRU Remuneration Code contained in the FCA's Handbook of Rules and Guidance (the "BIPRU Remuneration Code") and the FCA’s Guidance on Proportionality (the "FCA Guidance"). Blue Whale is not subject directly to SYSC 19E, the UCITS Remuneration Code. The principal aim of the remuneration rules is to ensure that firms have risk-focused remuneration policies, which are consistent with and promote sound and effective risk management and do not expose firms (or their clients) to excessive risk.
2. BLUE WHALE’S STRUCTURE AND BUSINESS
Blue Whale was established in 2016 by its Partners. It is structured as a limited liability partnership. The business is managed, owned and controlled by its Partners. Blue Whale is a small firm, as at 31st March 2018, in addition to its 2 Partners, the firm has a staff of six.
As at 31st March 2018 Blue Whale was the delegated manager of one UCITS fund: the LF Blue Whale Investment Funds – LF Blue Whale Growth Fund, a UK open-ended investment company (the "Fund”).
Throughout its business Blue Whale is focused on delivering value for money superior investment performance through highly active management.
Our investment approach involves two steps: firstly, finding companies who can grow sales and earnings over time and improve profitability and secondly, buying them at a good price. The Fund invests in a small number of high conviction holdings of high quality companies. The rigorous in-house fundamental research process of Blue Whale is central to the strategy.
Effective risk management is also a core element of the investment process. Blue Whale also utilises top-down analysis (taking into account global economic and political developments) as a way of managing risk in the portfolio and exposure to certain sectors and geographies. In addition to day to day monitoring by the portfolio managers, the firm uses an external compliance and risk consultant to provide further oversight. These arrangements are designed to ensure that the Fund is managed in accordance with its investment objectives and policies and without excessive risk.
3. BLUE WHALE'S HIGH-LEVEL ATTITUDE TO REMUNERATION
Blue Whale has adopted a single remuneration policy which governs all personnel across all elements of Blue Whale's business.
Blue Whale seeks to ensure that its remuneration policies and practices:
The Partners understand that the ultimate objective of the BIPRU Remuneration Code is to ensure that remuneration practices, structures and incentives at Blue Whale do not encourage any behaviour or activity which could be detrimental to, or conflict with, the long-term interest of the Fund and the investors in the Fund.
The Partners are the sole owners of Blue Whale Capital LLP. All the Partners have invested their own money into the business. The firm's capital is derived entirely from the Partners contributions of capital. The Partners are each paid a pre-determined, fixed proportion of Blue Whale’s net profits, in accordance with their ownership of the partnership. The Partners do not receive any other form of remuneration from Blue Whale. The Partners do not receive any salary nor are they eligible for an award of a discretionary bonus from Blue Whale. The Partners' profit share is totally dependent on the overall profitability of the firm.
The Partners' interests are therefore totally aligned with and dependent upon the long-term profitability and sustainability of Blue Whale Capital LLP. Given Blue Whale's single business model, the long-term profitability and sustainability of the firm is inextricably linked to the management fees generated from managing the Fund, as this is the only source of the firm's revenue. Blue Whale receives a flat rate fee based upon the level of the assets under management within the Fund. No performance fees are levied. The assets under management depend on both investors being willing to invest their money (and to continue to do so) and the ongoing investment performance of the Fund. It is, therefore, very much in Blue Whale's interests (and the Partners' interests) to ensure that the Fund performs in a manner which is consistent with its stated investment objectives and within pre-agreed risk constraints. Thus, there is a natural alignment between Fund investors' interests, the interests of Blue Whale and the interests of the Partners.
In addition, the Partners have significant investments in the Blue Whale Fund.
4. PRACTICAL APPLICATION OF THE REMUNERATION POLICY
This policy applies to all staff (including the Partners) of Blue Whale.
Under the BIPRU Remuneration Code, some of the Remuneration Principles are directed at certain "Remuneration Code Staff", rather than all employees.
Remuneration Code Staff are, except where it is demonstrated that they have no material impact on the risk profile of Blue Whale or the Fund:
Remuneration Code Staff include relevant staff employed by any entity to which portfolio management or risk management has been delegated. Blue Whale Capital LLP does not delegate any such activities. Neither the Partners’ profit shares nor their drawings nor employee salaries are deemed to be variable remuneration.
Blue Whale has considered carefully which of its staff are within the definition of Remuneration Code Staff. It has determined that only the Partners and the co-portfolio manager are Remuneration Code Staff. In reaching this determination, the Management Committee took the following into consideration:
The small size of the firm and its simple internal organisational structure.
The only persons with legal authority to bind Blue Whale as a firm are the Partners. The Management Committee has day to day responsibility for the management and operation of the firm.
Blue Whale's investment selection process is strictly adhered to at all times. Stocks are only selected for inclusion in the portfolio if they have already been admitted to an "investable universe" of potential stocks. A stock can only be admitted to the investable universe following rigorous analysis. A stock is only added to the investable universe with the agreement of both co-managers.
Portfolio construction (i.e. the process of selecting the stocks from the investable universe for the Fund portfolio) is only undertaken by the co-managers of the Fund.
As explained above, the only remuneration which the Partners receive from Blue Whale Capital LLP is a pre-determined, fixed proportion of Blue Whale’s net profits, against which they may take drawings. The Partners have concluded that as this is not related to individual or Fund performance and cannot be varied it is not variable remuneration under the BIPRU Remuneration Code. Accordingly, a number of the Remuneration Principles relating to variable remuneration are not relevant to the Partners' profit share in Blue Whale Capital LLP. However, if it transpires that the Partners were wrong to conclude that their profit share was not variable remuneration, the Partners would have felt justified in dis-applying these requirements on grounds of proportionality. This applies in particular to the requirements described in Principle 4 in respect of a Remuneration Committee, in Principle 12 in respect of payment in shares, deferral and performance adjustment. The concept of proportionality and its current application to Blue Whale is discussed below in section 5.
5. BLUE WHALE'S APPROACH TO PROPORTIONALITY
Blue Whale is required to comply with the BIPRU Remuneration Code in a way and to the extent that is appropriate to the firm's size and internal organisation and to the nature, scale and complexity of the firm's activities.
The Partners, having considered in detail the Code and the FCA Guidance, have concluded that it would not be proportionate to apply certain of the Remuneration Principles to its Remuneration Code Staff and employees more generally.
In particular, the Partners have determined that the following Remuneration Principles (as described in the BIPRU Remuneration Code) need not be adhered to in their entirety:
Remuneration Principle 4– Governance – disapplied in so far as it relates to the establishment of a Remuneration Committee and the requirement to have non-executives on the management body taking responsibility for the adoption, implementation and review of the remuneration policy.
Remuneration Principle 12 (b) – Remuneration Structures – Assessment of Performance – requirement not applicable to Remuneration Code Staff and not applied on grounds of proportionality to non-Remuneration Code Staff in so far as it relates to assessing performance in the context of a multi-year framework appropriate to the recommended holding period for investors in the Funds.
Remuneration Principle 12 (f) – Remuneration Structures – A substantial proportion of variable remuneration to be paid by way of Fund units, shares or similar instruments subject to a retention policy – requirement not applicable to Remuneration Code Staff and not applied at all on grounds of proportionality to non-Remuneration Code Staff.
Remuneration Principle 12 (g) – Remuneration Structures – A substantial proportion of variable remuneration should be deferred – requirement not applicable to Remuneration Code Staff and not applied at all on grounds of proportionality to non-Remuneration Code Staff.
Remuneration Principle 12 (h) – Measurement of Performance including adjustment mechanisms to reflect risks – requirement not applicable to Remuneration Code Staff.
6. REMUNERATION POLICIES
Remuneration Structure and Core Policies
Blue Whale's remuneration policies reflect the fact that Blue Whale is a limited liability partnership. A clear distinction is made between the Partners and the employees of the firm.
Blue Whale's approach to remuneration is relatively simple, reflecting the size and internal organisation of the business.
The Partners are each paid a pre-determined, fixed proportion of Blue Whale’s net profits, in accordance with their ownership of the partnership. These ownership levels are written into the Blue Whale Limited Partnership Agreement [Is there a partnership agreement or is it in the Deed?]. The Partners do not receive any salary nor are they eligible for an award of a discretionary bonus from Blue Whale. The Limited Partnership Agreement (being the Firm’s constitutional document) has been drafted to support the Firm’s continuation, and does not require payment to any exiting Partner.
The employees' remuneration package may comprise:
a basic salary; a share of net profits; a share of net revenue from sales; the possibility of being awarded an annual discretionary bonus, and certain other benefits including personal pension contribution.
The basic salary of an employee is set at a competitive level, in line with current market practice. It will always be at a sufficient level to allow for a fully flexible approach to be taken to the possibility of awarding (or not awarding) an annual bonus. The payment of a bonus is entirely at Blue Whale's discretion and will depend on both the financial position of the firm and the outcome of the individual's performance review which is undertaken at the end of each financial year. The performance review process takes into account a range of factors including the individual's performance and their broader contribution to the business including a range of non-financial measures. Those employees working in control functions such as risk management or compliance have their personal objectives set by reference to their specific functions and will be rewarded according to the achievement of those objectives, rather than the performance of the business more generally. Any bonus payment for an employee is agreed by unanimous consent of the Partners and the Management Committee.
As far as pension benefits are concerned, Blue Whale contributes a percentage of the employee’s salary into a personal pension scheme. Employees may contribute as much as they wish, in accordance with the normal rules governing personal pension schemes. The Firm's policy is not to make any increases in pension contribution when someone leaves the firm.
Blue Whale does not guarantee any annual bonus award, except where this is absolutely necessary in the context of hiring a new employee in the first year of their employment.
Blue Whale's policy is not to pay employees leaving the firm any early termination payments.
Blue Whale staff (including the Partners) are not permitted to undermine the principles of the BIPRU Remuneration Code by using personal hedging strategies, remuneration-related insurance or liability-related insurance. Staff are not remunerated with interests in the Funds and therefore have no reason to seek to hedge their liabilities. This Remuneration Policy is supplemented by the Personal Account Dealing Policy.
Blue Whale is required to ensure that remuneration practices are consistent with, and promote, sound and effective risk management. The remuneration policy should not encourage risk taking which is inconsistent with the risk profile of the Fund.
Blue Whale's investment strategy is described above. Sound and effective risk management is a key element of Blue Whale's investment strategy. The investment process is rigorously adhered to at all times.
The Partner's profit share is dependent upon Blue Whale's overall profitability which in turn is largely dependent upon the management fees received from the Fund. Blue Whale charges the Fund a competitive flat rate fee based on the level of assets under management within the Fund. Performance fees are not charged. There is no financial incentive to take risks which are not consistent with the risk profile of the Fund.
The employees may be awarded an annual bonus, but this is entirely at Blue Whale's discretion, and will depend on both the firm's profitability and the individual's performance.
Blue Whale does not have any practice of remunerating its investment personnel for generating high returns in the short term.
Alignment with Business Strategy and the Interests of the Fund
Remuneration practices must be in line with the business strategy, objectives, values and interests of each of Blue Whale, the Fund and the investors and should include measures to avoid conflicts of interest.
The remuneration policy is in line with Blue Whale's business strategy, objectives, values and interests.
The Partners, as owners of the business, receive a profit share which is totally dependent on the overall profitability of the firm. The alignment of the Partners' interests with those of the Fund and investors is discussed in detail in above.
As far as employees are concerned, Blue Whale seeks to attract and retain high calibre staff. The employee remuneration package is therefore competitive and reflects industry market practice. As described above, annual bonus awards are entirely discretionary and depend on the performance of the individual as well as the firm itself. In the opinion of the Partners, the pension policy in place does not pose any conflict with the long-term interests of the Fund or with the investors in the Fund.
The Partners have identified two primary types of risk which could arise within a typical asset management business from inappropriate remuneration structures:
The nature of Blue Whale’s business, the nature of the Fund which it manages, and the nature of its remuneration practices naturally mitigate these risks. From an investment perspective the risk identified above is controlled through Blue Whale's investment process and as noted above there is no incentivisation of investment staff based on short term investment performance. Investment decisions are only made by the co-fund managers.
From a sales perspective, given the clear and simple nature of the investment strategy, the Fund is generally suitable for the majority of investor types, including retail investors. Blue Whale emphasises the long-term nature of the investment strategy in all Fund literature and other documentation and seeks to ensure that investors understand that the strategy is not appropriate for those seeking short term returns. Sales performance will be considered in the light of net sales and will therefore be negatively affected if investors fail to retain their investment in the longer term. As Blue Whale is a single product firm at present there is no risk of product bias.
The Partners believe that the firm's remuneration practices are in line with the interests of the Fund and with investors in the Fund.
7. GOVERNANCE AND REVIEW
This Remuneration Policy has been developed by the Management Committee. The Management Committee is responsible for approving, maintaining and overseeing this policy and for approving any exemptions or changes. The Remuneration Policy will be reviewed by the Management Committee at least annually.
On an annual basis the Compliance and Risk Consultant will review the firm's compliance with this Remuneration Policy. Any issues identified as a result of this review will be reported to the Management Committee.
Taking into account Blue Whale's size, internal organisation and the nature, scope and complexity of its activities and the size of the Funds which it manages, the Management Committee has determined that it would not be proportionate for Blue Whale to establish a remuneration committee. All decisions on the remuneration of personnel are made by the Partners, who own the business and are collectively responsible for remuneration practices of the firm and by the Management Committee.
Blue Whale provides summary quantitative remuneration disclosure for its Code staff in the firm’s annual Pillar 3 document.
This Remuneration Policy contains details of Blue Whale's remuneration policies and practices for the firm as a whole. The Policy is available on the firm’s website at www.bluewhale.co.uk.