The Blue Whale Growth fund has had an impressive year. Its largest holding NVIDIA, the accelerated computing pioneer, has soared 236% year to date, contributing one third of the fund’s performance.
The £845m fund has clocked up several other successes amongst its top 10 holdings including Adobe, up 85% year to date amidst excitement about Firefly, which enables users to generate high quality digital images, and Microsoft (up 56%), which recently launched its AI assistant Copilot.
Blue Whale has returned 27.4% year to date, placing it in the top quartile of the IA Global sector and is on track to match its best year ever (the fund rose 27.6% in 2019). This follows a torrid 2022 when growth stocks were punished by rate increases.
Performance of fund since inception
Source: FE Analytics
Chief investment officer Stephen Yiu tells Trustnet why we are in a new regime of geopolitical uncertainty and how NVIDIA is undervalued.
What is your investment process?
Our investment philosophy is very simple: we invest in high quality businesses at attractive valuations.
We are fundamental investors and we do all our research in house. We don’t speak to any sell side analysts and we don’t read broker research. There are six of us in the investment team researching 25-30 companies so we spend a lot of time on our companies.
Why should investors pick your fund?
The Blue Whale Growth fund is a highly concentrated portfolio with the potential to deliver significant alpha. The journey could be volatile with a 25 stock portfolio, so investors need to be prepared for that, but we give our clients the opportunity to compound wealth.
There aren’t many high conviction managers in the global equity space. Terry Smith and Nick Train were the pioneers. We have a similar investment philosophy to Fundsmith and Lindsell Train but our top 10 holdings all look very different and between our three funds, no more than 15 stocks overlap.
If you allocated to all three portfolios you would still get 60 stocks that the fund managers are crazy about.
How are you positioning your fund going into 2024?
Firstly, we think we’re in a new regime and geopolitical uncertainty will remain in place for years. The western world is reshoring production and that spending is inflationary. We don’t expect inflation to get back down to 2% permanently for the next five to 10 years and energy prices will remain higher than people expect.
Secondly, we recognise that interest rates will stay higher for longer so even if they do come down, we’re not going to get to 2% anytime soon.
At the same time, consumer spending will remain under pressure, squeezed by inflation, mortgages and interest rates on credit cards. Consumers will be highly selective about where they spend their money. We are cautious on most consumer facing businesses.
We want to invest in companies that can find new markets for their products, so we’re talking about AI, which is why the portfolio did reasonably well this year.
We are also looking for companies that might benefit from this challenging environment. Mastercard and Visa, which we have in the top 10, charge commission on nominal spending so are beneficiaries of inflation. Supermarket inflation in the UK is about 10% so they are getting commission on a 10% increase in spending.
Another name in our top 10 is semiconductor equipment company Lam Research, which provides mission-critical equipment to foundries. The western world wants to hedge against the risk that one day Taiwan isn’t a viable supplier of chips, so governments are offering subsidies for foundries to be built and Lam will sell more of their products.
What was your best position this year?
Our best position was NVIDIA, which had a massive uplift in May when its shares rose 25% in a single day. Since then, NVIDIA’s shares have continued to go up, so twice in the past six months we were forced to reduce our position marginally because we can’t have more than 10% of the fund in any one company.
We first bought NVIDIA in June 2021 when its market cap was $500bn. By the end of 2021 NVIDIA’s market cap peaked at $800bn.
Over the course of 2022, which was a bad year for us and for NVIDIA, the share price fell by more than 50%, mostly due to interest rate increases.
In October 2022 NVIDIA’s market cap troughed at $300bn. At the time we bought more shares. We were strong believers that NVIDIA would become the next $1trn company; what we didn’t know was the timing and we didn’t expect it to happen so quickly.
We still believe we are in the early innings of the AI revolution. The reason generative AI will take the world by storm is data, which is all online and is ready for AI to analyse.
NVIDIA is trading at a one year forward price to earnings (P/E) ratio of 24x. We try to estimate NVIDIA’s growth over the next three to five years and our numbers are significantly ahead of what the market has priced in, so to us it is significantly undervalued. NVIDIA’s earnings have increased faster than its share price, so it continues to become cheaper.
What were your worst calls over the past year?
Our worst two positions were Charles Schwab and Sartorius, which detracted from performance by about 2% each this year, but which are both still in our top 10.
Charles Schwab’s shares have fallen by 20-25% and we have topped up our position in the past few months because our conviction remains intact and we have no fundamental concerns about their business model. Its valuation looks extremely attractive.
Charles Schwab is the largest investment platform in the US with $8trn under management. The share price was impacted by negative sentiment after the US regional banking crisis in March.
Charles Schwab makes money by investing customers’ cash into higher yielding assets but as rates have risen, customers have been incentivised to move their cash into money market funds so Charles Schwab’s profits have been lower than expected.
Sartorius produces mission-critical equipment and machinery for biologics drugs. It benefitted from a tailwind during the pandemic but its customers over-ordered and now have a backlog of inventory, which will take a while to work through.
Biologics account for a third of all drugs currently produced but 60% of drugs that are in the pipeline and not yet approved. In five to 10 years’ time, our thesis is that biologics will become the main way of making drugs because they work better.
What do you enjoy doing outside of investing?
I played table tennis when I was younger so when we moved into our new office, I bought a table tennis top for the boardroom table and started playing with my co-manager. Soon everyone in the team started to play and we now have a coach who comes to the office each week. Everyone gets 30 minutes of training so it has become a competitive sport within Blue Whale.