2022 ‘tricky’ year for Blue Whale as it underperforms sector for the first time
Image: Stephen Yiu (pictured), manager of the LF Blue Whale Growth fund Selling out of FAANG stocks was “correct” for the LF Blue Whale Growth fund in 2022, but it still was not enough to salvage returns, with the fund underperforming the IA Global sector for the first time since its inception. The £735m fund lost 27.6% in 2022, versus a fall of 11.1% for the IA Global sector, according to the firm. This was a very different outcome to the “blissfully uneventful” year the fund’s manager had been hoping for, after an admittedly “tumultuous” 2020 and 2021. Stephen Yiu, the fund’s manager and chief investment officer at Blue Whale Capital, admitted growth funds like his lost out in favour of value biased portfolios last year during market’s rotation to value. Writing his ‘Year in Review’ letter to investors, Yiu made the case for it being a temporary switch, arguing “even a broken clock is right twice a day”. Lower rates of portfolio decline was “thin gruel” for value investors who had suffered a decade of underperformance, he added. Comparing the MSCI ACWI Growth and MSCI ACWI Value indices, the former has recorded 234.1% total returns over the past ten years, with the latter making 139.8%, according to data from FE fundinfo. Narrowing that to the past 12 months and the leader changes, with the value index returning close to 9% and the growth losing around 3%. Much of value’s gain was off the back of a resurgent energy sector, Yiu pointed out, adding, “nearly all other elements making up the value basket saw annual declines, admittedly not to the same extent of its ‘growth’ counterparts”. The Blue Whale Capital Growth fund had its own particular successes and failures among its 27 holdings last year, however. “Given the inflation narrative” that dominated markets in 2022, Yiu highlighted a “handful” of winners that benefitted from this dynamic. “Payment titans Mastercard and Visa” and US retail stockbroker Charles Schwab all made positive returns. Once-favoured stocks such as Amazon, PayPal and Meta were all removed from the portfolio in late 2021 early 2022, in what proved to be wise decisions as the stocks fell 50%, 55% and 60%, respectively, from the point at which Blue Whale sold them to the end of 2022. Alphabet was another position the fund sold out of last year, the last of the famed FAANG stocks to leave the portfolio. However, Yiu was not totally out of love with the tech sector, with Microsoft remaining the fund’s biggest holding (9.8%). But even this was testing, with Yiu calling the tech giant “a particular disappointment”. Due to its high gross margin and the announced price rises on its key products, Yiu said he believed Microsoft would weather the inflationary storm and come out the other side “in even better shape than it had entered 2022”. The tech giant’s shares started 2022 at $336 per share and ended the year at just $239, a fall of almost 29%. Yiu said he remained committed to the stock: “The good news for investors is that you can now buy the best company in the world at a sizeable discount to its previous highs of 2021. “Microsoft still represents the highest-quality business we can find in terms of underlying fundamentals.” Another tech stock Yiu remained loyal to was Nvidia, which he defended in the letter. The tech company’s share price started 2022 at $294 before falling to $146 per share at the end of the year, a drop of 50%. Despite its challenges, Yiu said he believed Nvidia will be “the next trillion-dollar company off the back of its omnipresent processing chips, powering everything from machine learning to online gaming”. Looking ahead, the fund has returned 11.8% YTD versus 8.1% for the sector, meaning things were “moving back in the right direction,” according to the manager. Yiu said the portfolio is positioned to take advantage of what he sees as the key issues of the year to come – select digital transformation, reshoring and deglobalisation, and a resurgent energy sector, having made his first allocation into the latter in January. “It is important to note the changes that were made to the portfolio given the economic landscape we saw in front of us,” Yiu added. “We have always said we are not afraid to make substantial changes to the portfolio in search of the best opportunities of the moment.”
