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Peter Hargreaves' new firm to take on Terry Smith

Hargreaves Lansdown co-founder's new venture Blue Whale Capital is hoping to give Nick Train and Terry Smith a run for their money.

Peter Hargreaves' new firm to take on Terry Smith

Two-and-half years ago Peter Hargreaves stepped away from Hargreaves Lansdown, the business he had built from scratch.

This was around the time that he had suffered a heart attack, so when it was revealed that he was returning to the fray with a new firm, it was big news.

In July, Citywire reported that Hargreaves had decided to team up with ex-Artemis fund manager Stephen Yiu to back asset management firm Blue Whale Capital which hopes to rival Terry Smith's Fundsmith in the global growth sector. Hargreaves is named as a partner in Blue Whale Capital. 

The move has caused Yiu's track record to come into focus because he did not receive anywhere near as much publicity as his former outspoken co-manager Tim Steer

It turns out that Hargreaves' relationship with the fund manager goes back many years.

‘Stephen worked for us 15 years ago and the thing that I established over that time was that he was the most conscientious and professional person I have probably ever met – the only person who I’ve ever felt was as conscientious and professional as him was the guy who did my open heart surgery,’ said Hargreaves.

During the intervening years, while Yiu worked alongside Steer at New Star and Artemis on UK growth funds, Hargreaves stayed in contact with him.

‘I wanted somebody I could trust in the growth sphere,’ said Hargreaves.

‘I also feel that most UK investors are really underweight America. Ever since I came into this industry people have always told me America is overvalued – people forget there are thousands of fantastic companies in America where you can buy them at a share price that can make you money.'

Stay focused

Blue Whale is positioning itself as an alternative to Fundsmith Equity and Lindsell Train's funds and investment trusts.

The business currently offers one fund and Hargreaves said there were no immediate plans to add any more. Nevertheless, he hasn't ruled out further launches down the line.

The CF Blue Whale Growth fund will be run by Yiu and Robert Lloyd, who previously worked together at hedge fund Nevsky Capital. The fund has a management fee of 1% or 0.75% depending on how the fund is bought. For example, the broker used to purchase the fund.

Yiu and Lloyd certainly echo Hargreaves’ views on the US, allocating over 60% of the global fund’s exposure to companies in the country. They believe this differentiates the proposition from Fundsmith and Lindsell Train.

Portfolio breakdown

So what will the fund Hargreaves (pictured above) has poured £25 million of his family money into seeding look like?

It is a concentrated portfolio of 25 to 35 stocks, which the managers claim to know inside out.

‘One thing we feel quite strongly about when running a concentrated fund is the level of research we need to put in to understand the company, to understand the stock and to understand the competitors. This is one thing we think will separate us and help differentiate ourselves from some of our peers,’ said Yiu.

He explained: ‘Anyone running more than 30 or 40 stocks is probably not doing enough work on the stocks they run and there is a good chance that they will just be tracking the index.’

Lloyd adds that managers who hold 100 stocks is unlikely to know all of the stocks inside out .

'So it becomes sort of a declining return on your time spent,' he added.

Stock selection

Stocks in the portfolio will be split into three buckets: defensive growth, structural growth and cyclical growth.

Co-manager Lloyd’s top pick in defensive growth is Zoetis, the world’s largest producer of medicine and vaccinations for pets and livestock.

‘The pet market is growing very quickly in the US and outside, there are some structural trends in terms of the growing middle class, particularly outside of Europe and internationally, where pet ownership is growing,’ said Lloyd.

Yiu highlighted a survey conducted by Zoetis which showed that pet care is the last thing people cut back on during a downturn. 

American computer software company Adobe Systems sits in the fund's structural growth category. 

‘Adobe is quite simple. In the past, they would sell all this software off the shelf, you buy it and then after two, three years they put out an upgrade and you have to buy it again,’ Yiu explains.

‘But about five years ago, they started to go into the subscription model so everybody is just based on subscription - and if you look at the margin, it is going up.

‘What is interesting – apart from margin expansion – is the number of people who are actually using the software has increased in terms of sales. They have a broad coverage because people are finding it easier and they don’t have the hurdle of paying a few hundred pounds.’

Finally, within the cyclical growth bucket, Yiu likes security and lock manufacturer Allegion.

‘It’s quite a simple story, smart locks are coming to the market. At the moment you have this general replacement cycle of people changing their locks every 10 to 20 years.

‘But what is going to happen over the next five to 10 years is all of these smart locks are going to come in and people will want to change locks in the same way you change iPhones,’ Yiu said.

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