Why Did Blue Whale Fund Underperform in 2022?

TL;DR

The Blue Whale Growth Fund underperformed in 2022 primarily due to rapid interest rate hikes and inflation. Despite this setback, fund manager Stephen Yiu believes the situation is cyclical, and a recovery is expected in the medium term as interest rates stabilize. The fund maintains a concentrated portfolio of high-quality businesses, positioning it well for future gains.

Transcript

foreign to our latest Insider interview today in the studio I have with me Steve and Yu who is the full manager of the blue whale growth fund Stephen thank you for joining me today so Stephen you aim to find the highest quality businesses at an attractive price so how do you go about doing that in practice so the way that we do it uh is we do do al... Read More

Key Insights

• 👨‍🔬 The Blue Whale Growth Fund conducts in-house research and avoids sell-side research, allowing for a unique investment approach.
• 👻 The fund's concentration of 25 to 35 stocks allows for in-depth analysis and a higher potential for outperformance.
• ☠️ The performance of the fund in 2022 has been negatively affected by the interest rate cycle and inflation, but they believe it is a temporary situation.
• ✋ Microsoft is still considered a strong investment due to its sticky and high-quality business model, despite the fund reducing positions in other tech companies.

Questions & Answers

Q: How does Steve and Yu conduct research and analysis to find high-quality businesses?

Steve and Yu and his team rely on in-house research, avoiding sales side research and speaking with sell-side analysts. They analyze primary sources of information and translate their understanding into a unique financial model to make forecasts.

Q: Why has the fund's performance suffered in 2022?

The rapid increase in interest rates and inflation, along with the Ukraine crisis, has impacted the fund's performance. The valuation of many companies in the fund has been affected by higher interest rates, but they believe it is a temporary situation.

Q: Can the fund outperform the market over a 10-year period?

Steve and Yu are confident in their ability to deliver outperformance. They aim to run a high conviction portfolio of focused investments, which can yield higher returns compared to broader market indices with a large number of companies.

Q: Why did the fund sell out of the FAANG stocks?

The fund never invested in Netflix due to its perceived lower quality business. They sold out of Facebook due to increased competition from TikTok, difficulties in targeting audiences, and concerns about the profitability of the metaverse investment. They reduced their positions in Amazon and Google due to macroeconomic headwinds and inflationary pressures.

Summary & Key Takeaways

• Steve and Yu conducts in-house research to find high-quality businesses at attractive prices, using primary sources such as reports, transcripts, and conferences.

• The Blue Whale Growth Fund runs a concentrated portfolio of 25 to 35 stocks, allowing for more in-depth analysis of the companies they invest in.

• The fund's performance in 2022 has been disappointing due to the rapid increase in interest rates, but they believe it is a temporary situation and expect to recover losses in the coming years.