“One of my top picks in this portfolio is a magnificent seven stock worth £1.2 billion”
In this week’s episode of Fund Of The Week, we take a closer look at the Blue Whale Growth fund, managed by Stephen Yiu. With a five-year track record that has returned 93pc against its peers’ 61pc, Mr Yiu’s fund has caught our attention. We speak to him about his investment strategy, why he’s bullish on Nvidia, and how he plans to capitalize on the growing AI trend.
A Tale of One Stock: Nvidia
2024 was a remarkable year for markets, with one stock dominating the headlines: Nvidia. The chipmaker’s share price rose an astonishing 185pc over the past 12 months, pushing its market capitalization to a staggering $3.3trn (or £2.6trn). Some have sounded warnings about Nvidia’s valuation, suggesting that it is approaching bubble territory.
However, Stephen Yiu, manager of the £1.2bn Blue Whale Growth fund, disagrees. He believes Nvidia has even further to go and plans to stay invested for its next stage of growth. "Nvidia is a high-quality business," Mr Yiu asserts. "We don’t think there are any challengers – not even Advanced Micro Devices (AMD)." When asked about the stock’s valuation, he responds, "I don’t think 30 times earnings is excessive. Apple has high single-digit revenue growth but trades at 30 times earnings because everyone thinks its ecosystem is intact."
Investing in High-Quality Businesses
The Blue Whale Growth fund focuses on investing in high-quality global businesses that are exposed to "mega-trends." These trends include the growing demand for artificial intelligence (AI), which Nvidia is well-positioned to capitalize on. Mr Yiu explains, "We try to maximize returns by investing in companies that are leaders in these mega-trends."
Reducing Exposure to Meta
While the fund still holds a position in Meta, owner of Facebook, Mr Yiu reveals that he plans to reduce this holding due to concerns about chief executive Mark Zuckerberg’s spending habits. "We exited Meta in early 2022 because we had concerns about the metaverse," Mr Yiu explains. "However, last year we reinvested as we concluded it is probably the best positioned within the Magnificent Seven (Nvidia excluded) to benefit from generative AI."
Meta’s Strengths and Weaknesses
Mr Yiu highlights Meta’s strengths, pointing out that the company has access to vast amounts of consumer data through its social media platforms. "The most valuable thing for AI is data," he notes. "Everyone is doing the same thing so the better your data, the better your model and output will be." However, he also expresses concerns about Mr Zuckerberg’s willingness to invest heavily in generative AI, which could impact Meta’s profitability.
Nvidia: A Capital-Light Business
Mr Yiu believes that Nvidia remains a capital-light business, unlike its peers. "All of its production is done through Taiwan Semiconductor Manufacturing Company," he explains. "It isn’t spending money with any other companies." This focus on outsourcing has allowed Nvidia to maintain a high level of profitability.
The Best and Worst Investments
When asked about the fund’s best investment, Mr Yiu reveals that Nvidia has returned an astonishing 586pc over the past five years. However, he also notes that the fund’s worst investment was Sartorius, which is down 48pc since June 2021.
Peter Hargreaves’ Commitment to the Strategy
Despite some of the fund’s underperformance, Peter Hargreaves and his family remain committed to Mr Yiu’s strategy. "They haven’t sold any of their holdings," a spokesperson for the Blue Whale Growth fund reveals. In total, they have just over £200m invested in the fund.
In conclusion, the Blue Whale Growth fund has consistently outperformed its peers under Stephen Yiu’s management. His focus on high-quality businesses exposed to mega-trends, combined with his ability to adapt to changing market conditions, makes him an attractive investment manager for those looking to capitalize on growth opportunities.