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Blue Whale - Consummate Application.
by Peter Hargreaves

11 Sep 2020

 

Blue Whale soon celebrates its third anniversary.

Our story starts eighteen years ago when Stephen Yiu joined Hargreaves Lansdown. We have regularly kept in contact. Eight years ago, Stephen registered Blue Whale Capital - the aims and the markets it would encompass were still to be decided. It took four years of research and deliberation with the journey commencing on 16th August 2016.  At lunch Stephen detailed his thoughts and ambitions - I was so keen on the idea I pledged my full support.

The route forward would be long and hard.  It took a year to put everything satisfactorily in place. We launched the LF Blue Whale Growth Fund over a year later on 11th September 2017. The aim was both simple and ambitious - to find companies with exceptional growth potential that would lead to the Fund outperforming its peers.

We now sit here three years later with a top-performing fund. I had no doubt from the beginning that this would be a success, however I did not envisage we would be in such a fantastic position so soon – especially considering the unenviable market conditions the team has had to navigate. So what was it about Stephen’s private conversations with me that led me to becoming an ardent supporter from the start? And what do I see as the reasons for the success so far?

First, I need to mention the investment in the team - I know of no investment management business that throws so much research into just one fund; four investment professionals in addition to Stephen.

Secondly, I have been extremely impressed with the way a generalist fund has been able to consistently outperform. In the Global sector there are many sub-sectors that wax and wane to top the charts one day, and then disappear into oblivion the next. For example, if Healthcare were the flavour of the month, a fund with a remit specific to this area would outperform its peers by simply riding the wave. The LF Blue Whale Growth Fund does not have a specific remit outside its ability to invest in global equities. Therefore, its ability to both keep pace with those sectors surging ahead, and then drop them when they run out of steam is admirable.

Finally, I have mentioned before Stephen’s interest in the US. Before we started the Fund, he made it clear to me why he was finding so many opportunities there. For years I had been looking for a fund that could give me exposure to this most exciting of economies and its highly entrepreneurial companies. Unfortunately, UK based managers seemed neither interested nor capable of sifting through the plethora of opportunities in the US to find the real gems. Stephen assured me he was interested and could certainly highlight those that he saw as having the greatest potential. Results to date have been extremely positive and the diversification to my portfolio has been an added bonus.

I must commend the team at Blue Whale for achieving, what I believe to be, the “Holy Grail” of investment management. It started in 2018 when, over the course of the year, the team managed to deliver a positive return in largely negative markets. The peer group in which Stephen sits – the IA Global Sector – delivered a negative return on the year. However, the team managed to achieve positive returns over the course of the same year. I am pleased to say this trend continued during the global downturn as the news and reality of global pandemic set in. Stephen and his team managed to protect the Fund on the downside, falling less than the general market (which we would also hope to repeat in a sustained bear market), whilst delivering accelerated growth on the upside.

I believe this was achieved through two key tenets of the investment approach:

  1. The willingness to move out of stocks should they not represent the best opportunities for growth.
  2. The focus on finding the “winners of tomorrow”.

It was of enormous comfort to me to have spoken to Stephen during the height of the pandemic. He explained how the Fund focused on those companies leveraging global digital transformation. Indeed, as the world moved online during Covid-19 the Fund did benefit. At the same time, he explained his ruthless approach in dealing with those investments that would likely suffer due to Covid-19 – he simply cut them from the portfolio. This was a breath of fresh air. I know of many investment professionals that hold onto “losers” in the hope they will come good. Cutting your losses and moving on takes real conviction – a trait I love to see in people investing on my behalf.

So as we approach our third anniversary I can declare Stephen’s ambitious expectations of delivering significant outperformance has been achieved in every one of those years. Nevertheless, the Fund remains invested in companies which Blue Whale believes will deliver better results than the market consensus expectations.

Many fund managers are in the twilight of their careers and slow to understand the new world. The Blue Whale team are part of the new world and understand new technologies, new entertainment streams, new work patterns. Today, I am pleased to report the team are studying and assessing which disruptive enterprises will be next to take the world by storm. There are still many opportunities – I am confident they will find the better ones.

 

 

 

 

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.