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In June's Master Investor Magazine I have had a look at the top ten companies held by the Blue Whale Growth Fund. The manager employs what it calls "The Beautiful Companies Concept."
It is worth being conscious that the Blue Whale Growth Fund is a relatively new fund having been started in September 2017. The performance to date has been good but the growth style of investing can see periods of weakness.
The Blue Whale Growth Fund is likely to be less defensive than the Fundsmith Equity Fund and the Lindsell Train Global Equity Fund.
The best way to understand a fund, in my view, is to look at the stocks that it owns. Good funds own good stocks.
With that in mind I have had a closer look at the largest ten companies in the Blue Whale Growth Fund.
Master Investor Magazine - June 2019 issue
FAANG's under pressure
The FAANG stocks are Facebook, Amazon, Apple, Netflix and Google. They have recently all come under pressure due to possible US anti-trust investigations.
Blue Whale's had 10.1% of the fund in FAANG stocks at the end of March 2019. The latest data for the S&P 500 shows that 12% of the index is in FAANG stocks.
Blue Whale's top ten positions included Alphabet and Amazon at the end of May. Alphabet appears may be the target of anti-trust investigations and saw its shares decline by 6% on Monday.
Shares in Amazon were off by 4.64% on Monday. The Blue Whale Growth Fund is likely to see some near-term pressure.
Blue Whale appears to own the higher quality FAANGs with the manager having no exposure to Netflix or Apple.
Blue Whale's top ten
A look at the top ten holdings at the end of April 2019 and May 2019 is instructive. Adidas fell out of the top ten in May and was replaced by Amazon.
Shares in Adidas performed well in May and as such Blue Whale is likely to have trimmed the position. Shares in Amazon were weak in May and the manager is therefore likely to have added to the position.
Blue Whale's top ten at the end of May 2019
Source: Blue Whale Growth Fund
Blue Whale's top tend at the end of April 2019
Source: Blue Whale Growth Fund
Anti-trust good or bad?
At first glance anti-trust investigations are not something to be positive about. But they do indicate a strong market position.
As a general rule, it is better to invest in companies that dominate their markets.
Microsoft has been subject to multiple anti-trust investigations. The company was the largest in the world in 2000 and is the largest company in the world today.
Alphabet and Amazon
On face value Alphabet appears to be an attractive company. A possible concern is the expected decline in profit margins and a recent slow down in top line growth.
The Google search engine business has retained a relatively high market share at 88.74% (Statista).
The forecast free cashflow yield for Alphabet is now 4.7% in 2020 and 5.5% in 2021. The company also has a growing net cash position.
Amazon is expected to make rapid margin progress over the next couple of years. The forecast free cash flow yield is expected to increase from 4.6% in 2020 to 6.2% in 2021.
It is not clear what scope anti-trust investigations have to derail progress at both companies.
Alphabet forecasts - a growing and profitable company
Source: SharePad, normal calendar year-end
Blue Whale Fund read across
The Blue Whale Growth Fund has exposure to a number of relatively young growth companies. This increases the blow up risk for the stocks in the fund.
At the same time some of the mature companies in defensive funds also have meaningful blow risk. Fundsmith used to own Imperial Brands and Lindsell Train currently owns Pearson.
On balance, it is not clear if the Blue Whale Growth fund is risker or less risky than the established defensive funds- better to own Amazon than companies being clobbered by Amazon.
The fund had 11.8% of its assets in cash at the end of May 2019 and so should be well placed for any market weakness. The situation at Alphabet and Amazon will need to be monitored.
The bottom line is that if the Blue Whale Growth Fund owns good stocks it will perform well. If the fund owns weak stocks it is unlikely to perform well.