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Blue Whale makes a splash by beating Fundsmith

Peter Hargreaves had Fundsmith in his sights when backing Blue Whale Capital and its global fund has beaten Terry Smith in its first year.

Blue Whale makes a splash by beating Fundsmith

Blue Whale Growth, the global equity fund backed by Hargreaves Lansdown founder Peter Hargreaves, has made a spalsh in its first year, beating the top-performing Fundsmith Equity fund.

Hargreaves had Fundsmith and Lindsell Train in his sights when teaming up with former Artemis manager Stephen Yiu to launch the new fund group last year.

Like Terry Smith and Nick Train's funds, Yiu launched with a concentrated portfolio of stocks.

And he has got off to a strong start, with a return of 24.6% in his first year, placing the fund fifth of 208 funds in the Investment Association's Global sector over that period.

That's ahead of the 17% Terry Smith returned with his £17 billion Fundsmith Equity fund, although just pipped by the 25.3% from the £5.3 billion Lindsell Train Global Equity fund.

Baillie Gifford Global Discovery, the smaller companies fund run along similar lines to the Edinburgh Worldwide (EWI) investment trust, was the top performer over the period, up 41.5%.

Neptune Global Smaller Companies was second, up 34.1%, followed by Baillie Gifford Positive Change, up 28.9%.

Across the sector, funds have delivered an average 9.9% return over those 12 months, while the MSCI World index has risen 11.5%, a record Yiu said was 'shameful'.

‘A lot of managers have made their money and think 5% outperformance is acceptable,' he said. 'Our peers are not focused enough on outperformance.’

Among those celebrating is Peter Hargreaves, who invested £25 million at the launch of the fund, a stake that is now worth more than £31 million, and accounts for a large chunk of the fund's £76 million in assets.

'I don’t think I have ever made an investment that has returned this much for me in its first year – it has been the best performing fund in my portfolio,' he said in the fund's latest update to investors.

Cloud computing potential

Yiu (pictured) has had a strong weighting to the rallying US market, which makes up 60% of his fund, and has been a big backer of the technology sector, accounting for more than two-thirds of his portfolio.

Among the fund's top positions is Amazon (AMZN.O), hardly a rare holding among global fund managers, though Yiu said many of his peers were unwilling to make a significant bet on the e-commerce giant's continued growth.

‘There are others in our sector that hold Amazon but they might only hold 2-3%, in line with the index,’ he said. ‘We hold more than 5% - so they’re not going to outperform as much as us.’

Despite a roaring rally in the shares, which have doubled over the last year, helping the company become the second in history to attain a $1 trillion market cap, Yiu said investors were still not appreciating the company's cloud computing opportunity.

‘The market is missing this completely,’ he said. ‘People don’t realise how dramatically the underlying business has changed in the past few years.’

The market has forecasted an operating margin for Amazon of 6.8% by September 2020 but he said Blue Whale’s internal research showed a margin of 15% to 20% in the long-term.

‘The business is growing at around 25% a year,’ he said.

Cloud computing has also informed Yiu's investment in Salesforce (CRM.N), another top 10 investment and up by more than 60% over the last 12 months.

Among Salesforce's products is Einstein, which uses artificial intelligence to help businesses in their dealings with customers. 

‘You can’t compete as a business unless you know your customer,' sad Yiu.

Yiu believes Blue Whale's in-house research capabilities, as well its young team, differentiated the group from some rival fund managers.

‘Some 300 managers in our sector all have access to the same paid-for research. What value does it add? Zero,' he argued.

‘They might read about digital trends but they don’t really understand the extent of its impact,’ he said.

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