When most UK retail investors think about funds that invest in high-quality businesses, Terry Smith’s Fundsmith Equity (B41YBW7) will likely be the first name that springs to mind. It’s had its rough patches, but it has overall been an exceptional performer for its investors over the years, returning roughly 15% a year since its launch in November 2010, according to the fund’s own data.
The Blue Whale Growth (BD6PG78) fund really stands out to us as an alternative high-quality growth stock option, one that we believe is still insanely overlooked by most mainstream investors. Like Fundsmith Equity, Blue Whale Growth’s investment philosophy is deceptively simple; invest into high quality businesses with long-run growth scope, at attractive prices.
This is typically measured by investment criteria such as ROCE (return on capital employed), ROE (return on equity), free cash flow and others.
BEATING ITS BENCHMARKS
Blue Whale Growth turned seven last month and has beaten its Investment Association Global Index benchmark in all but one of those years (2022), when lots of active funds struggled, Fundsmith too.
Since inception, the fund has delivered an annualised total return of 12.7%, far better than the 9% served up by global equities over the last 25 years, based on Barclays’ Equity Gilt Study. More recent performance is also impressive, up 11.8% in 2024 (to 30 August) having put up 30.7% returns in 2023. Its IA Global benchmark has put up 8.4% and 12.7% respectively, for comparison.
Blue Whale eschews research from third party brokers, instead relying on its own in-house team of analysts to come up with great investment opportunities, then robustly track them in detail once they make it into its concentrated portfolio, typically with between 25 and 35 stocks (currently 26). It means the fund’s team can spot opportunities early, whether that’s new ones, top-slicing or adding to existing names, or see mistakes that need fixing.
It works. For example, Blue Whale Growth started buying AI (artificial intelligence) chip champion Nvidia (NVDA:NASDAQ) more than three years ago at around the $20 mark (adjusted for stock splits), long before the stock went to the moon. Nvidia now trades at $121.44 and its one of the fund’s largest stakes at close on its 10% of funds limit.
But while it does have sizeable stakes in names like Nvidia, Lam Research (LRCX:NASDAQ) and Meta Platforms (META:NASDAQ), this is no tech fund, an accusation that remains one of the chief frustrations of Blue Whale Growth manager Stephen Yiu.
‘If you ask me today what our mission statement is, it’s to compound your investment at the highest return possible. That’s what we want to do over the medium term,’ Yiu says.
NOT JUST ABOUT TECH
So, investing in tech is not for tech’s sake, rather because it remains an area where Yiu and his team see the potential to generate the most alpha, exactly what investors want. Tech stocks currently represent about 45% of the fund, which means more than half is outside the space, in things like high-end fashion (Moncler (MONC:BIT), financial services (Charles Schwab (SCHW:NYSE), and oil and gas (Canadian Natural Resources (CNQ:TSE).
While some readers might worry about portfolio duplication between Blue Whale Growth and Fundsmith Equity, given their similar approaches, this is not really an issue. For example, of the pairs’ respective top 10 stakes, only Meta Platforms and Visa (V:NYSE) are in both.
BLUE WHALE’S INVESTMENT LENS
High-quality large and mega-caps at an attractive price
Companies with strong competitive positions and good management teams
Exposed to structural growth drivers
High return on invested capital, equity and cash flows
True, there are cheaper funds around but not by much for this level of successful active management, with ongoing charges at 1.09%.
That compares to Fundsmith’s 0.95% ongoing charge, although this is partly a function of the scale advantages of the larger fund and we would expect Blue Whale Growth charges to come down as assets continue to build. Ultimately, Shares believes Blue Whale Growth is a fantastic, under the radar investment option for those taking a multi-year view.
DISCLAIMER: The author of this article (Steven Frazer) owns a personal interest in Blue Whale Growth and Fundsmith Equity.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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