Latest Peter Hargreaves News
Feb 28, 2021
Over the course of three and a half years, portfolio manager Stephen Yiu and four investment analysts transformed Blue Whale Capital from a start-up investment firm with £25 million assets under management to a major player in the UK market. Blue Whale Capital is backed and co-founded by legendary investor Peter Hargreaves, who created the financial services company Hargreaves Lansdown. In 2017, Hargreaves handed Yiu £25 million to set up the new asset management firm. Assets under management have since surged 2,700% from launch to £700 million, tripling over 2020 alone. The influx of flows might have something to do with the firm's stellar performance with its flagship Blue Whale Growth Fund , which returned 26% to investors in 2020 relative to the benchmark's 14%. The fund's philosophy is a high conviction approach, investing in 25 to 35 high quality businesses at attractive prices. Does the approach sound familiar? Perhaps because it aligns with the investing philosophies of two UK investing legends, Terry Smith of Fundsmith and Nick Train of Lindsell Train. Both Smith and Train are investors who Yiu looks up to, but now also competes with. So far, he's not doing too badly. Yiu returned 75% to investors since launching the fund compared to Smith's 15% return over a three-year period and Train's 44%. Despite the similarities between the three funds, there is very little overlap in their holdings, Yiu said. On average each of the three funds invests in 25 stocks and the overlap between the three is around 15 stocks, Yiu said. "We obviously would compare ourselves against them, as in, we want to do better than them," Yiu said. "But I think the market is big enough that, typically, you don't get an investor just holding one fund … So I think we are quite complimentary." Stock picking strategy The growing investment team of five focuses heavily on valuation. The main goal is to have a differentiated view from the market consensus. To achieve this the investment team stays clear of independent or external research. "Because [the research] is readily available to our competitors then [it] means that if your judgement or your decision is based on that research, it's unlikely that you will be able to do better than the market," Yiu said. To identify high-quality stocks, Yiu and his team look for four components: 1) High return on invested capital on a sustainable basis "The company would need to have some structural drivers for growth opportunities in the near future, if you can't grow, then it's unlikely you can deliver a high return on invested capital over the medium term," Yiu said. 2) A good management team A good management team that can take the company to the next stage is essential. 3) Companies that aren't too cyclical One of the reasons the fund did well in 2020 is because the earnings trajectory of most companies in the fund weren't exposed to macroeconomic uncertainties, Yiu said. He trys to find companies that avoid the majority of macro uncertainties. 4) Valuation The firm needs to have a differentiated view versus the market comparing their forecast to market consensus. "We just keep doing this continuously to ensure that the portfolio is competitively positioned for outperformance potential," Yiu said. Driving outperformance This stock picking strategy helped drive outperformance last year. Many of the portfolio stocks were beneficiaries of digital transformation, either in ecommerce and payments, such as PayPal ( PYPL ), or in software, such as Adobe ( ADBE ) and Microsoft ( MSFT ). "PayPal is the one that we really like they just reported a fairly strong set of results this week," Yiu said. "And bitcoin is one of the things that they are embracing, or as another option for the consumers to utilize." Adobe, a top 10 holding, is a 39-year-old company and has benefited from digital shifts. It used to rely on creative professionals to buy upgrades of its software. However, the firm recently moved to a subscription model, an approach that remains lucrative in a downturn. "So in a recession, let's say they have seen their workload reduced by half, they will still be paying Adobe the $30 because otherwise, they would not be able to do anything with the other 50% of the workflow," Yiu said. "So this is the beauty of their business model that's only been made possible since cloud becoming readily available to companies and to consumers." Autodesk ( ADSK ) and Intuit ( INTU ) are also high quality software businesses that are relatively independent of the macro environment, Yiu said. He is selective when it comes to technology, avoiding semiconductors, hardware companies and loss-making companies, such as Zoom ( ZM ) and Tesla ( TSLA ). "I think because we have a very strict discipline on valuation, it's very difficult for us to justify why we have to pay up so much for a company that is still loss-making, that is still unclear," Yiu said Instead, Yiu is looking for highly cash generative companies, a strategy which could prove beneficial in a bear market . "If [another bear market] does come, then typically, when you have too long of a waiting time for a company to deliver the earnings, then they will be hit the most, right?" Yiu said. Was this article valuable for you?