[Expert Talk] How to outperform benchmark indices with Stephen Yiu from Blue Whale Capital

Feb 26, 2020

Today’s guest is Stephen Yiu, Chief Investment Officer of Blue Whale Capital. Stephen has over 20 years of experience investing in public equity. His fund has delivered consistent outperformance since inception two and half years ago. We began our conversation with Stephen’s investment approach, such as reasons for running a concentrated, high conviction portfolio, what underlies his buying and selling decisions, valuation metrics he uses. And then delved deeper into his current holdings, what are the key underlying investment themes and how these themes will play out in 2020 and beyond.

Pls note that there is discussion on the past performance of Blue Whale Capital in this episode and Past performance is not a guide to the future. Risk of loss.

Key Takeaways

• Increasingly efficient market narrows the comparative informational advantage enjoyed by professional fund managers and thus making it harder for active funds to outperform benchmark indices
• Stephen adopts a bottom-up investment approach using in-house fundamental research; he runs a concentrated, high conviction portfolio of 25-35 stocks
• Guideline for buying decision: 1) companies with a strong competitive position - typically the market leader in their respective sector 2) good management team 3) companies that are exposed to structural growth drivers 4) ability to generate high return on invested capital 5) company's earnings profile has little to do with macro uncertainties
• Guideline for selling decision: 1) when there’s any risk of disruption to their business model fundamentally 2) when valuation is no longer attractive
• Key valuation metrics used is free cash flow yield; currently the market is trading about 7% free cash flow yield five years from today; based on fundamental analysis, investor can then decide if it is justified to pay a premium or discount relative to the markets
• Key investment themes and companies highlighted 1) Digital transformation: Adobe and Paypal 2) Medical tech – non-invasive procedures: Boston Scientific 2) Luxury brands: LVMH

 

Episode links

Blue Whale Capital: https://bluewhale.co.uk/
Hargreaves Lansdown: https://www.hl.co.uk/
Blog post on how efficient market is affected active fund management: https://bluewhale.co.uk/blog/2019/09/04/is-an-increasingly-efficient-market-killing-off-traditional-active-fund-management/
Blue Whale top 10 holdings: https://bluewhale.co.uk/top-10/