The London South East, Investing Matters Podcast Episode 8 Stephen Yiu from Blue Whale Capital

LSE 00:01

You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.

Peter Higgins 00:17

Hello, and welcome to the London South East Investing Matters Podcast. My name is Peter Higgins and today I have the pleasure of speaking with Stephen Yiu of Blue Whale capital, Ni hao Stephen.

Stephen Yiu 00:30

Ni hao!

Peter Higgins 00:32

Stephen It's been an absolute pleasure for me to have you on this Investing Matters Podcast. I've watched your career for some time now. And you've had an absolutely monumental rise with regards to Blue Whale Capital and fund management industry has welcomed you with open arms because of how you've gone about your business.

But I want to start if I may, with regards to your journey of you as a young person. And I want to use a quote here from Marcus Garvey, the political activist and entrepreneur once said, “The Greatest possession of a man is his character.” Stephen, what has helped you and made you the person that you are today?

Stephen Yiu 01:14

That's a difficult question to start with. Probably going to speak for an hour on that. I think I've generally only got a passion for the investing.

I mean, in terms of investing on the stock market. And I recall when I first started my career at in Hargreaves Lansdown, that's where I met up with Peter Hargreaves at the time. Obviously, I was fairly young, that was more than 20 years ago.

But then I think as you go through your journey, if you keep doing what you think you really enjoy, and hopefully you're good at it as well, then I think at some point, you're going to do something, hopefully that will be of interest, or maybe at a bigger scale. I think that's what I've tried to do with Peter at Blue Whale, and is trying to consolidate everything that I have acquired over the years and trying to put it in practice.

Peter Higgins 02:02

Excellent. Thank you. I mean, what I find fascinating was obviously I'm not saying he had a cushy time, but you had a really good job at Hargreaves Lansdown. And you're there and the markets are crumbling around you and everybody else around 2007. And you chose that optimum sort of time to think, hmm, it's now's the time for me to go into the fund management industry full stop not just working with Hargreaves Lansdown as an investment analyst at the time. What were you thinking? And what is anyone saying to you, Stephen? Really?

Stephen Yiu 02:34

Yeah, I think the that was interesting, wasn't it? So the years I spent at Hargreaves Lansdown, Bristol was until 2007. And I came to London to work at New Star Asset Management at 2007. And obviously, if people have followed what happened since then, or in 2008, a year after, then everyone knows that maybe that wasn't a good time to, to come to London, or to join this new firm.

But I think what hasn't stopped me is like, I think in anyone’s career or life is like, I think controlling your own timing is impossible. Sometimes, if you're given the opportunity, you just want to pursue the opportunity, irrespective of whether you have a crystal ball, when something would happen positively or negatively. And I think you can never control timing.

And, and I think at the same time, if I look back at when Blue Whale was started in 2016, about five years ago, now as a company, that some people will suggest that oh, you have pick a good time, because that was the time when a lot many of these tech stocks, which I'm sure we can talk about, have just started to go up. But if you ask me, I would love to have started the business maybe another five years before, but obviously, five years prior to 2016 I wasn't ready to do so.

So you can never time this, really. And luckily, like we haven't started a business now. Because I think if we started a business now, it will be slightly trickier because then I think the environments bit more challenging. And obviously to be able to deliver the same level of performance that we did over the last four years might be less going forward. But still, I think we would do well depending on your on your time horizon.

Peter Higgins 04:13

You make an interesting point there regarding time horizon. But I want to come back to that later. I want to talk a little bit more about your time at New Star, which is now Janus Henderson, then Artemis, and then Nevsky Capital, please can share with us some of the fund managers you worked with during that time, what you experienced, and what were your greatest lessons during your formative time as a fund manager?

Stephen Yiu 04:34

So yeah, I think it's a good one to take off. So I have worked with a manager called Tim Steer for about 6-7 years through our New Star Asset Management and Artemis. And at the time we were running both a long only UK fund and also a Pan European long-short hedge fund.

And so people forget that I actually started my career as a UK fund manager, but at the moment, as far as the Blue Whale Growth Fund is concerned, we have no holdings in the UK stock market, which is quite, quite different to what I kind of started out more than 10 years ago. And I think at the time, if you look back at the period, for the UK stock market, we are talking about between the period 2007 to 2013/14. I think that was a period of time that it was I think, UK, we do have a lot of differentiated advantage as companies, overseas earners, exporters, industrial company, even like if you talk about like the oil and gas or mining company, they've been selling quite a lot commodities to China.

That was a really good time. And at the time, I think I recall working with Tim, we always played this kind of theme in the fund that you long overseas earners, their UK company, but then you are kind of short, the UK domestics company, which would be typical the high street retailers, etc, that are quite low quality. And I think over that period, you can do pretty well out of that.

But, I mean, obviously, I mean, we can come back to this topic later that I think the era has changed. I think since Brexit, I think there's a lot of things that I think UK could have done better, but at the moment is still dragging on for a bit. But at the same time, the US companies, the American technology company hadn't really taken a leap, and now they are shaping how the rest of the world is going to live under the likes of Google, Microsoft, Apple, etc, etc.

And I think at the time what I have learned from Tim, which, which I think goes through my career working with Martin Taylor as well, is that in order to do well, you need to have a differentiator angle to your thesis. And obviously, your thesis would need to be right, so that you'll be rewarded with significant outperformance because it could work both ways. If you get your research wrong, and then your differentiator view doesn't actually is going to take you to the wrong path. I think the challenge is always that there are so many competition in the market.

And obviously I think different will require like a different time period in the market have a slightly different playbook. I think that the end game is the same that you want to have a differentiated angle. But then I think back in the old days, when we are talking about maybe the information is less widely dissipated at real time context. So if you do get a chance to speak to the management to learn a bit more about the business, you get to speak to speak to some sell side analysts, I think there's a lot of value that could add from an active manager perspective.

But I think with the introduction of MiFID, too, and also a lot of regulation in place is a lot more difficult to get advantage in terms of doing some of the stuff that used to work before. But then the end game is always the same. And I think working with Martin for about two years at Nevsky Capital, really taught me that. And Nevsky if people don't know it, it was a long-short global hedge fund. And obviously, if you you're familiar with the hedge fund world, there's a lot of research being put in place a lot of kind of resource in order to generate significant positive performance at the time. And so I think summarising all that.

And just looking out to what we're trying to do here is, if you believe that to get significant performance potential is to have a differentiated angle, then at the same time, you will need to have the conviction behind it.

But how do you get conviction is you need to do a lot of research behind the scene. I'm sure you're going to come back to me on some questions, but at Blue Whale that we don't use any sell side research. We don't speak to any sale side analysts. There are five of us in the team and we do all the research in house. So at least we can claim that some of our research are original, that hopefully that originality of the research would give us an advantage over our competitors.

Peter Higgins 08:51

It comes seamlessly to my next question, Stephen. So thank you for that. I was about to ask you the question with regards to what led you to set up Blue Whale Capital, you've already spoken about the differentiators. But I want to expand that if I may, regarding you sharing with us the philosophy and the investment process behind Blue Whale the differentiators and its universal stocks.

Stephen Yiu 09:13

Yep. Thank you for that. I think I already talked about that at the beginning is I do have quite a strong passion or interest in investing.

And I think one thing that you have also learned throughout your career, or at least my career is, in order to be able to work or to run a product that is quite similar to what you truly believe in. Sometimes it's quite difficult if you are just a fund manager working for someone else because I think one thing which is quite mathematical and I think that is definitely one of the differentiators that when we first started Blue Whale, Peter and I wish shared is believed is I think typically when you work as a fund manager even though that there's a lot of franchise model across the fundamental industry, that you may be running this product with your team.

And then you would have this p&l That gets split with the parents company, and then you would have a share within the investment team. But then ultimately running a lot only product, you will need to run a lot of money to get a lot of resource on your investment team. And just just imagine that when we first started in 2017, when we launched a fund, we were running 25 million pounds.

And we are charging less than 1% fee. I mean, you can do your own calculation how much income we were generating at the time. But at the time, Peter and I, we truly believe that over time that we could deliver a product that people want with good performance, then between the two of us, we would need to invest into the product. And when we say invest in the products, it's not only set the product with money. So Peter said that the fund was 25 million pounds of his own money, but at the same time, you need to invest in the investment research team.

So when we started off running 25 million, there were already four of us on an investment team. And that is unheard of in our industry context that you do not get for headcount on an investment team, running a 25 million pounds fund in the UK.

But obviously, if you asked me, could I have done it myself, it's just me running it with 25 million, I guarantee you the performance would not be as good as what we have achieved over that period. Because it's not just about the intelligence of some people running it. At the same time. It's a lot of hard work, I love research, a lot of due diligence that you need to take a lot of kind of brain power to understand what's going on in the world.

And the scenes and obviously the AUM of the Blue Whale Growth Fund has grown. And now we are running about billion. And there are now five of us on the investment team. And we continue to look for new talent. And I'm sure at some point, we might expand the team further. And I think that is the commitment that Peter and I have made that we want to build a good product with good performance. And overtime, I think some people would take an interest in the product. But it's a chicken and egg scenario that if I were just a fund manager at some other firm, it would just be myself. I would never be able to come up with this product with the performance that we have deliver. So.

Peter Higgins 12:24

I think it's absolutely amazing that you've delivered it anyway, with just now fine. You never mind for at the beginning. You've got one more, and now you're sitting AUM of 1 billion pounds. Stephen, that's absolutely amazing. So I think it's fantastic.

Now, you've not touched on a little bit of the area here regarding the universe of stocks. I'm going to go back there if I possibly can. There's been countless debates, Stephen, and papers written regarding investment diversification. At Blue Whale, there appears to be a tendency for your fund to hold around 30 stocks or so please could explain why that level? How do you maintain that number? And when you and your team find a potential new winner? How do you go about adding that to the portfolio at a reasonable price? And keeping the number and maintaining the actual diversification?

Stephen Yiu 13:11

Yeah, this is a very good point. I could definitely expand on that. So the other moving part within how one can deliver significant outperformance is that you need to run a highly concentrated portfolio. Because I think I'm right to say that with the exception of Baillie Gifford's, which tend to run probably around 100 companies, but I mean, I think they are quite different, most other fund managers in my peer group that you tend not to do too well, versus the market if you have too many stocks in your fund. Because if you ask any manager that have, let's say, 75 holdings in that fund, how do they justify the conviction surely that it's impossible, they would have the same level of conviction on the 75th holding versus the top 10 holding.

And I think there's always one of these things like we are all human at the end of day, I mean, we are not like I don't know, like a super computer that we can just analyse anything then and be able to understand anything. There's a bit of limitation in terms of everyone's career or know how our knowledge base or how their intellect are shaped. And ultimately, you need to work out what you can do well, and what you can't do well within the stock market, because that ultimately, if you look at the MSCI World Index as a proxy for the world's stock market, there are about 1,600 stocks, and they just tell me they can anyone follow the 1,600 stocks to start with.

Secondly, to understand every single industry that the 1,600 stocks are operating in globally across geographies, is impossible. And also at the same time. I mean, there's some areas that would never touch, such as banks, I think throughout my career. I mean, in my previous career I have invested banks.

By now, I think over the years, you learned that there's no one that can get behind a balance sheet of a bank, like even a management couldn’t. And in order to run a high conviction portfolio that say, Okay, why don't we pick? I mean, whether you pick like Lloyds Bank or Citibank, like, you never know what goes on behind the scene, right? Like, okay, I can share the view that maybe people use the bank to play on the interest rate cycle that, okay, interest rates going up, let's buy some banks, maybe you think make some money. But I think equally, you could lose money for other reasons, such as if our audience follow what happened to Credit Suisse, or Deutsche Bank.

And I think it's not just as simple as it messing in the bank on the back of the interest rate going up. So I think there's certain sectors that we decided we're not going into. And then the other sectors would be the likes of oil and gas company or mining company.

It's not like this company are bad companies, I think some of the market leader good companies, but then because they can't really control the price of that product, which let's say the oil price, or maybe the iron or copper, then if the market is not going in the direction in terms of those product prices, then they won't be able to infringe that, at the moment, yes, those prices are going high.

But it could go the other way around, as we all know, it will show cycle. And so I think, once you start filtering out sectors that we don't think we could add value on, then you ended up with a number of sectors that we feel actually, these are the sectors that we understand these other sectors that we feel we could add value through our research. And they would be the lights of the some financial, excluding banks, let's say index providers, financial services, payment providers, or the current network, like MasterCard, or Visa. And at the same time, luxury brands, consumer staples company, medical equipment company, and obviously, then we also have the technology company, such as Google, or Microsoft, etc. And I think there's still quite a lot of companies that we can cover. And we feel that we can add value in these companies.

Peter Higgins 17:06

It's interesting there seem because what you've done there is obviously found your universe. But I've read numerous times where people are trying to lump a lot of the tech companies that you've you've purchased all in the same little ballpark. And there's so much diversification amongst them regarding software services, regarding payment companies, and so on and so forth, whether they're in financial or digital content, for instance. So you have got quite a lot of diversification. So I wanted to add on that and ask you with regards to the research that goes in to differentiate these companies. So they're not overlapping too much. How much work is involved? You said about brain power before, how much work is involved in actually selecting that one stock out of that whole universe of stocks?

Stephen Yiu 17:48

Yeah, I mean, this is what we do on a day to day basis in terms of researching our companies. And so if I give you some colour in terms of how we go about researching a company is that we we start with the primary sources. I mean, I already mentioned that we don't speak to any sales analyst. So we're not going to get their research report to understand what his company does. I mean, we would go back to the primary sources, such as any reports, conferences, transcript, and you will be surprised, I'm sure our audience, if you are a DIY investor, you should not be surprised how much information is out there.

Now, compared to when I first started my career that you could hardly Google what happened to this company. But nowadays, like you could find so much stuff online for at least bigger companies. And there's a lot of cross referencing at the same time, like you can easily be doing work on Microsoft, but and you will also be doing work on their competitors. And trying to find out what's going on the market share is people do people like the product in terms of the star rating, even late software, they have some sort of star rating, you can look at the ex employee survey, or the view of the management team, whether they like the company, there's a lot of these things going on out there. And it's quite interesting, then the same time you can look at job postings to see whether the certain industry is hiring more people, or that those products will be part of the kind of the hiring requirement, etc.

So I think that's a lot of things out there. And ultimately, I think, if you think about I mean, I gave you this example before, like, so what does it mean to have five people in a team, let's say, versus maybe two people in a team and running more stocks? And if I'm just making this number up now about it's a typical setup in our industry, like typically, you would easily have two people in the team running about maybe 70 stocks portfolio, which is not unusual, because a high conviction portfolio of about 25 or 30 companies is unusual, because I could definitely, I mean, our audience should know that. I think in the UK, the really well respected and successful manager would be Terry Smith of Fundsmith and Nick Train of Lindsell Train, but then you can't actually name many others that are running only 25 stock portfolio, and hopefully Blue Whale is trying to do something similar. And so if you have two people running 75 stocks, and assuming that individually, they work maybe 10 hours a day, just focusing on the portfolio, then I worked out that on average, between the two team members, you spend about five hours per holding per month, between the two.

So five hours per holding per month. And then once you spend that five out, you move to the next holdings. And by the time you get to 75 Holdings, that's one month for you. And then if then you do the same exercise for the team at Blue Whale, on average, we invest into around 25 stocks at the moment in the fund is 25. Five people same calculation 10 hours a day, then on average, we'll be spending about 40 hours per holding per month. So eight times more, irrespective whether we are smarter or not, maybe we are just the same. Maybe we are not that smart. But if we can spend eight times more 40 hours versus five hours, per company per month that it means that there's a lot of research that we are able to go through, then you because like ultimately, five hours is not a lot.

Everyone will say they read annual reports, we do two, we do nothing, nothing different. But we just meet and ended up reading a few more than our competitor, right. Like if you're 40 hours, you can read at least like five reports more than your five hours. So I think there's no magic behind what we do. But at the same time, which is equally important, which we could touch on this as well, recently, we managed to sell out of both Facebook and PayPal before their results. And obviously, if you follow the two stocks, I think the shares collapse about 30% since they reported, and obviously, if you also follow the Blue Whale fund, we have had both company in the fund since we started in 2007.

So these two holdings are not new to us, we have done a lot of work. And the other thing people tend to underestimate is the amount of time not just about getting a company into your fund is required. Obviously that requires a lot of research before we get to a level of conviction that we want to buy this company into the fund.

But at the same time, the ongoing research, which is never ending, things change, things evolve, competitive landscape evolve, the management team could change direction, such as what happened to Facebook in the metaverse, spans, etc. And I think the ongoing research is equally important than just the initial research. And there's no answer but ultimately, if you have a team of people, just focusing on at about like 25-30 companies, I think you probably would hope that you understand that company a bit better than your competitors, who hasn't spent as much time I'm sure they would get there at some point. But there may be the share prices already reacted.

Peter Higgins 23:01

Absolutely, you took sort of beautiful point there about the quality and also the quantity and importance of research. And the importance of the signs were there. And you and the team at Blue Whale spotted those signs, some fund managers were adding had been adding to those exits that you've made over the past three to six months, the ones that you've made recently, they've been adding all along. So it's it's very, very important, I think to actually point that out. But I wanted to just touch on a little bit regarding some of the exits.

And the nuance that you and your team saw to enable you to think, actually we meet in this month, that's a really good look at what's going on here. Because things are changing slightly. And you and the team were ahead of the pack, you know, and some of them are still considering what to do. And they're still holding, you know, a lot of the hedge funds, a lot of the fund managers still holding those holdings. So if you just touch on a little things that you saw that some people didn't see?

Stephen Yiu 23:54

Yeah, I think ultimately we do not have a crystal ball. I mean, we like like if we had if we knew like Facebook shares and PayPal shares are going to be down 30% We would have exited maybe three months ago.

Not the result. Right. So we I mean, there's so the severity to have that sell off is a bit unexpected, but obviously we didn't expect it to be good. But that bad is slightly unexpected. But I think this is the thing, isn't it like I have always said this, we are not doing anything different to any investors like including our competitors. But he just if you have a team of people that are quite focused, and then you do your work a bit better or you take your work quite seriously because you're investing your clients money into the stock that is based on our research, then I think the ultimate advantage that we get is you are able to act a bit quicker hopefully quicker before your competitor does because like nowadays, I'm sure loads of the team we'll be discussing.

What are we going to do with Facebook and PayPal? Should we buy more should we exit now? Oh, the shares is already down so much. Surely maybe it's too late. Or whatever I don't know but ultimately in the stock market, in addition to investing for the long term, sometimes I think sporting the changes or disruption that could take place, that if you can spot that a bit sooner than I think there's a lot of alpha or outperformance that you can capture by avoiding the kind of disaster. And I think for Facebook and PayPal are definitely one of those examples that we can reference to.

But I'm sure that there will be other names that let's say, I mean, I don't know whether you have Amazon on your list that we want to talk about, like, we exited Amazon in December. Obviously, one of our competitors have recently acquired Amazon. And I think if you track the results, the results wasn't that great. Actually, I think the good news on the back of the result was they managed to raise the Prime membership prices. But some people actually asked me after they reported, or do you have any regrets of selling on Amazon, we have no regret, because everything that we were concerned about are still in place. It just didn't materialise in the quarter or in in on the day that he got reported. But then for Facebook and PayPal, it did.

So let's see whether we are right or wrong on Amazon. But I think that particular day when the share was I mean, recover or went up 10%, I think we have no regret, because he was a right decision to sell it on the fundamentals on based on the research that we have gone through. And at some point, it could happen, or maybe we will be wrong. But these kinds of things, it's like you just as an investor is I think hindsight is a beautiful things because they can always look back at this to say, oh, this is what we should have done.

This is like something that we should have avoided, but you never have that right luxury of that crystal ball, and then is over time that over a long period of time, at least I think for us, I mean, we've been running the fund for about four and a half years, I think I look back at a time I think we just managed to get more things right than wrong. I mean, there would be many things that we got wrong. And just it doesn't show up in the performance. Because over time, if you get more things right, and you would do better than your competitors.

Peter Higgins 27:06

Indeed, I mean, there's a famous quote from Peter Bernstein, the American financial historian, economist and educator. And he's quoted as saying, “the fundamental law of investing is the uncertainty of the future”. So that sits well with all the different things you just said there, which is you said beautifully.

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Peter Higgins 27:41

So with interest rates, and inflation, environment rise, and all the metrics and the fundamentals have gone completely out the window of late Stephen. Yeah. And Blue Whale has been assessing some of this absolutely on point. And the tech growth, and tech stocks going forward have been impacted. And you've been very, very nimble.

And a noted recently, obviously, we've just touched on you, you exited Amazon, you went head-to-head with Visa, and you exited Amazon, but you kept Visa, which I thought was very, very interesting going forward. And also before that you've already exited MasterCard, what was it about Visa that you saw? Or do see going forward as the reasons why you kept that?

Stephen Yiu 28:20

I think it's actually the other way around, we exited Visa But we have kept MasterCard in the fund.

Peter Higgins 28:26

Sorry apologies.

Stephen Yiu 28:27

No, that's fine. So basically, the we do like the payment space. I think we like the obviously I think the competitive positioning of both Visa and MasterCard. And I think what we didn't like for these two companies previously was that because they are in terms of their business, they do make quite a lot of money from cross borders or international travel.

And obviously throughout the last two years, you would have thought like maybe we would have a bit of like a recovery sometime last year earlier last year that now then it just get postponed continuously until recently that I think people are allowed to go on holidays, with more more choices, etc. So I think that is something that we didn't like and hence we decided to consolidate our position into one over just having to company in the fund and we decided to pick MasterCard and Visa.

But the thing about Visa versus MasterCard is I think the thing is if you follow this company, I mean Visa is the market leader in the US is a bit bigger as a company is very difficult to argue that research in itself is not a high quality business.

But then if you follow these two companies quite closely then you would have probably share our conclusion that MasterCard is marginally a more innovative company. I mean it has taken share from some of the Visa’s customers I think in the UK they have called Santander few years ago and I think MasterCard have now gone into some crypto or facilitating some sort of crypto platform, doing transactions and all that stuff.

I mean, they're all marginal stuff as in like, it's not going to change the numbers materially because it's still a subset of the market. But on the other hand, like Visa has always been the incumbents, because they're really big, they could be quite slow moving, etc. And I think what was quite interesting was, I think, if you look at the route between Amazon and Visa, I mean, that wasn't the reason that we're selling out, because I'm ultimately Amazon, we still need to have some Visa network behind it, because otherwise, then half of the American population can pay for the goods on Amazon, so so that it's just a route, but I think he's just shows you that Visa is kind of on a relative basis, a bit slower, versus MasterCard, but, but I think that both of them are quite good companies.

Peter Higgins 30:48

Thank you for that. Continuing on the current macro environment, Stephen, you purchased Charles Schwab, which you see as a potential beneficiary of the rising interest rate environment, you know, having exited PayPal, and Meta and Facebook, please could expand on the metrics or what your team is seeing as to why this could be beneficial, obviously, interest rates, amount of cash that got on the books, etc.

Stephen Yiu 31:09

Yep, so I touched on earlier about that we are not interested in banks, because banks is quite low quality in in a way that you can't get behind the balance sheet. But then obviously, we do recognise that the interest rate is going up, which is not a surprise.

And we do want to have some company that could benefit on the bank of the rising interest rate. But at the same time, you don't want to trade off the quality of the business. Hence, we would not be interested in the bank.

I think if you follow Charles Schwab, which is the largest investment platform in the US, is actually a good company is actually a fine company. The first thing is the customer base is for a sticky because the on average, I think the age bracket will be over 50. Secondly, if you look at the average portfolio size of these people, they are over 200k dollars, individually on a platform. In contrast that we were looking at Robin Hood, which would never interest us, but just part of our research, I think that number is probably like a few $1,000 or one to $2,000, which is really small. It's really like people using probably using their furlough money to open account while they're sitting at home.

So anyway, but if you look at the look at what happened to Robin Hood, share price will probably give you a good idea where this company is heading it might disappear because they don't have the scale and also is never that profitable to start with.

But then it doesn't actually change anything for Charles Schwab. And at the same time, because majority of people in the US, I'm sure it will be similar in the UK, is for any typical investor, you never even know that I'm sure you have other assets outside of the investment platform, you never are truly invested in the stock market or the bond market. So in the US, as far as the Charles Schwab customers are concerned, they on average, they are holding about 10% cash, with Charles Schwab paying nothing so the customer get nothing from Charles Schwab. And obviously, then Charles Schwab could use that money to invest into interest paying products, such as the bond market, etc, etc.

And then if the interest rate goes up, then they make more money on the back of that, ultimately, they will still pay a bit to the customers. But I think that differential as we all know, if anyone have any, any money in cash with a bank, we know that we're not getting a lot for the money that we could get investing directly, etc. So I think that is that. But at the same time, I think if you look at the structural growth driver behind Charles Schwab, it's not just about the interest rate going up. At the same time you we do know for a fact that the American economy has been doing pretty well. And over time, it will continue to do pretty well because of the innovation, that entrepreneurial, set up culture in the US. And if you believe that the US economy over time would do well, then the nation is going to be wealthier and more money is going to pop with Charles Schwab.

So hence, you you will see, even without the interest rate going up the asset size or how much they manage overtime, we were trying to up work. It's just this is how it works, because they're the largest platform to capture the wealth. And last but not least, if you look at the recent acquisition that they made, which is to acquire a TD Ameritrade in the US is one of the top competitors that have strengthened their competitive positioning.

Luckily, they were allowed to do that. And there's a lot of synergies behind the scene. And if you put all this together, then the valuation is looking quite attractive. So it's not just purely on the back of the interest rate going up. Surely we like that. I mean, we probably don't want it to be the other way around. Right? If you're the rates is now going down while we are going into a cycle of quantitative easing, then even though with all the structural drivers might not be that interesting in valuation terms, but I think when you have all these things going in the right direction and then it will be quite beneficial.

Peter Higgins 35:02

Thank you for that response. And I appreciate the fact that you've, you've gone into the financial sector and you still managed to avoid the banks, which is really a sensible thing to do. Right, Stephen, we've had web 1.0 in the 90s, which is essentially basic HTML, email, etc, Read Only then the internet evolved into web 2.0. And started information centric, and now we're seeing fast flowing transactions, quantum computing, machine learning, etc, etc. How artificial intelligence vaccines even developed in less than 18 months, rather than 10 years.

Now, essentially, we're talking about Web 3.0, decentralised, private, secure, web evolving. Which companies do you think could be the winners? And why? And how is Blue Whale going to capitalise on it?

Stephen Yiu 35:46

That is very difficult. I truly agree. And I strongly believe in this web 3.0 on what's going on. Now. I think the problem with the company listed in the public domain is you tend not to get too many of these companies when the technology is at a really early stage.

But we do as a team that we do follow the development quite closely in terms of what's going on in the crypto market, the blockchain market. And overtime, I think, what we see, hopefully, I mean, at some point that will be certain company in the in the stock market that could capture some of it, but not at the moment, is I think that would be increased increasingly a lot many more applications that will be built on top of this rail. Because I think if you asked me what I believe in Bitcoin, I'm not a believer in Bitcoin, because Bitcoin in itself have no use does no usage on the back of just some people can that has like a digital goal, which means doing nothing.

Like even if you have like, some gold coins, like sitting sitting under your bed, that's no use to it. So hence, there's no application can be built on that. And then but if you compare what's happening within the crypto or the blockchain space at the moment, versus when we first have the internet, back in the 1990s, then so many companies that haven't existed at the time now have become really big company, for example, like even yeah, we have exited Facebook, or like the company. But at a time that wouldn't have Facebook, Facebook wasn't even started at the time.

And then Facebook as part of the Facebook group, they also have WhatsApp and WhatsApp wasn't existed at the time because we didn't have the internet connection. Even Netflix started, already started them. But he was still selling DVDs on the internet or something. He wasn't the streaming Netflix that we know of now. And but obviously these companies are very sizable now, or very important in terms of influence and how how we conduct our day to day life.

But it wasn't possible. When the internet speed was still really slow. I'm sure you remember as well, you dial into your modem, you connect to a phone line and the internet speed it takes you probably I don't know, 10 minutes to load a patient Amazon website, by the time you check out probably takes you an hour now it takes seconds on your smartphone, etc. So I think it's something that we do follow quite closely. But I think the short answer is is that anything that we could invest into the stock market now? I think it's very little because it's still not proven. And a lot of the things that are developing now is definitely we don't think they are the answer to what we are going to experience.

Maybe we'll link up with the metaverse at some point, who knows, but but Metaverse is not here yet. So so so I think it takes time for that to develop. But I think the other side of this research is, is that you want to monitor whether it's going to cause any disruption to our existing companies. Because one thing that we think is a big threat to MasterCard or Visa, which is not imminent, but it could come five to 10 years later, is whether we will be conducting our day to day transaction through crypto, right?

I mean, not you don't need to conduct 100% of every transaction. But let's say if you conduct like 1/3 of your transaction using the crypto network, then that money is not going through the MasterCard and Visa network anymore, and someone is going to make less money. Right. So I think that is something that we do monitor closely, even though that yeah, we haven't got the direct opportunity to invest into at the moment.

Peter Higgins 39:23

You've almost answered the question I was about to ask Stephen. I'll pose it anyway. It does appear that virtual currencies are going to be required for the metaverse to thrive. If so, which payment companies currently have a head start, or will the current payment incumbents see their lunch being eaten by the new innovative payment companies? Much like we're seeing, Visa, MasterCard and PayPal, is dominance being eroded currently?

Stephen Yiu 39:48

Yeah, I think yeah, the answer is inevitable. Like we would ultimately have just maybe like a handful of companies that would be global in terms of scale and quite dominant, but it's just like when the journey is developing is impossible to pinpoint which one and I think going back to our exit from on Facebook or Meta was that we it's not like we disappear believe that Metaverse is going to happen. It might happen 10 years from today or 20 years from today. I'm sure it will happen within my generation.

But the problem is you don't actually know whether the 10s of billions of dollars that Facebook has spent on building the metaverse are they guaranteed to become the winner on the back of this because as we know, Google is doing something Apple is likely to come up with and some sort of 3d glasses next year.

And Microsoft is doing something as well. And and ultimately, you if you follow what goes on in the world is like you have the payment network, which is only two company duopoly is MasterCard or Visa, the mobile operating system is Google Android, or Apple, iOS. Anything else in the operating system?

I'm sure you remember, Microsoft did try to venture into mobile operating systems. Sony has one BlackBerry have one like that so many other Where are they now? Like we don't even know like even search engine? I mean, Google only started as the seventh search engine on the internet. It wasn't the first. But where were the other seven or six that started before Google, like many people wouldn't remember, have you not gone through that generation? So the thing is, like, if you think about, oh, we are now sitting in this massive opportunity, I think unless you are running a, I don't know, maybe a VC portfolio.

But then I think even in the context of like a VC portfolio, it needs to be quite well diversified, which is not high conviction, which is completely the opposite of what we do. Because like, if you have to pick 25 companies in the space that are quite speculative and uncertain, you can't pick 25 companies on that. If you say why do you pick 100 or 200? That maybe you get something right?

That's the thing. I mean, obviously, it's not my role to comment on Baillie Gifford. But I think if people are following what Baillie Gifford is doing, I think they have a lot of investment across many private companies and listed companies.

But you don't just make one or two. For every Amazon or Tesla that came up from their portfolio. I'm sure there are many others that we have never come across. And but they did make an investment. I'm just speculating here. And I think that is what you do. If you're going into the market that you can't actually be certain who is going to come out as a winner?

Peter Higgins 42:32

Yeah, no, I fully appreciate that. Thank you for that reply. I mean, within the metaverse Stephen, the main or one of the main things around it all is obviously digital content. And as a race for digital content. Now we've seen what what's happening with regards to Microsoft buying Activision, etc. And the gaming side, they're going to go down. So you can see with that, and I'm looking at one of the winners that you've already got in your portfolio that could really, really do well. And that, to me is one that very few people talk about that often. And that's Adobe, because it's involved in all different aspects of content and digital media.

Stephen Yiu 43:06

Correct. We continue to like Adobe, I think Adobe has been one of the most beautiful companies that we have ever invested because it's quite clean. I mean, Microsoft is great. But then Microsoft is a bit more complicated in terms of the many different products that they have that Adobe has always been one of our favourites and remain our top 10 Holdings since we started.

And I think if you, you do follow Adobe's the end market, which is something that we look at people label Adobe, as a tech company, surely, yeah, it's a software company. It's a subscription model in terms of the product that you subscribe. But if you follow the end market is about content creation, on the internet, Instagram, the Photoshop, the video editing, and you will only get increasingly more of content being ever created and consumed at the same time, compared to before and that's not stopping, isn't it?

Like they just continue that journey. And if you look at the competitive positioning of Adobe, I mean, it remained a market leader owning about I think, 60 to 70% of the market share, I think at the moment, you do tend to see some smaller competitors creeping up, like maybe some free product that they offer. But then you never get the breadth, if you really want to do something serious.

I mean, you never get the breadth of the capabilities of software to do it. So. So I think we consider like Adobe, I think one thing if people follow the share price of Adobe that the share price has not done that well recently over the last three to six months. And I think part of the reason is because sometimes I think the stock market want to have shorter term catalysts, like yes, everyone understood that over time, Adobe is going to capture a lot more of this content creation market.

But then what do you have now? I can't wait for like three years to get to that size. I mean, what do you have now? And I think you have to follow Adobe's like they have not had a price increase for a few years already. And if they do come to the market for a price increase, such as what Microsoft did, I mean, we are going to pay 15 to 20%.

More this year now, if your Office 365 subscribers, that Adobe has not done a price increase, and I think without a significant price increase, which we expect them to do in time, then you don't have shorter-term catalyst. And I think that sometimes the stock market has got bought late, everyone understood their story, but the market tend to underestimate the kind of the longevity and the potential term of their market over the medium term with little disruption. So we continue to like Adobe, hopefully, they might increase the prices. And I think that could be a catalyst.

Peter Higgins 45:42

Another company, which is completely off most UK and global investors that you have within your portfolio, Stephen is Atlassian. I think I know a lot about tech stocks, and I do a lot of research myself. But even that one was off my radar, and you guys have got it in your portfolio, you held it for a little while, it's an extremely well, please, could you tell us about that company, and what attracted you guys Blue Whale to that particular company, and what it does?

Stephen Yiu 46:07

Yeah, this company is not, I think not well known outside of the end user base, which I'm going to come into. So it's a software company, which we like, because the one good thing about software company is they have a scalable distribution platform. So they want to roll out new products. Nowadays, everything is on cloud, you just need to press a button, you can update it, if they want to roll out a new addition. I mean, like, they want to introduce you to some capabilities or new products, they can just press a button, and you will be seeing on your screen.

At the same time, if they want to raise prices is all recurring revenue stream. As soon as you stop paying, if you don't like that, then your SWAT software stopped working, which is quite powerful. And so software in itself is something that we always like.

But obviously, we don't want to go into the end market to say, okay, is the end market interesting enough in terms of structure, growth, etc. And then for Adobe would be the content creation we already talked about.

For Atlassian. The end user are software developers. So the Atlassian product, Jira, which is widely used within the software developer space is a bit like our teams, if people have used teams or slack is how, like a small group of people or developers work together to basically code certain capability of a bigger piece of the programme. And then there's a lot of obviously a lot of debulking of improvement, there are a lot of things you need to try, you can't just say, I changed the code and without telling anyone that you're on it, right, because it could affect other parts of the programme. So that's a bit of a lot of tracking a lot of the debulking. And if you change something, it could affect other parts of the programme.

And then there's a lot of back and forth. And so So basically, once you you get once you adopted the software to develop certain software programmes, then the switching costs, again, is going to be very high, because you can't just bin that and go somewhere else. And and I think people notice already that we are in a period that we not only that software developers is probably the highest pay job out there. At the same time, I think they are in demand as as in like the shortage of software developers is huge. And, and overtime, you just expect that anyone, or in any company, you would expect many more software developers compared to before, and then that a lot of these people would be using an Atlassian product. And then the other funny thing about a lesson is I think when we kind of first look into the companies like they recently have done five times increase in prices in terms of subscription. And you think like five times increase, that's a lot.

But what that actually meant was they were previously under charging the user at about $2 a month. And now they're charging about $10 a month. But that's five times increase. And obviously, as a company, you you make five times more when you go into a subscription model. So I think that plays a role into the valuation of Atlassian as well, because I think is once you get into nitty gritty, then you still want to invest into the shares when it's kind of cheap, or you have a differentiated angle, which is not expected by the market yet.

Peter Higgins 49:11

Brilliant. I think that was a really good purchase of yours, because it's not one of those companies that I've seen that lots of other hedge funds or fund managers are involved in. It's like, where did it what did he say, you know, so you've got that one there. So that's absolutely phenomenal. Now, Stephen, I've got one more question for you. Before we finish for me, you know, you founded Blue Whale in 2017.

There's always been talk or speculation, you know, you've been ever successful. You're focused and focus and focus on that and the reason why you've been so successful, but what are your ambitions and goals for Blue Whale? Could there be another fund launched by Blue Whale in the future? What's your thinking?

Stephen Yiu 49:51

Thank you for that. So I think we are still relatively young as a company. I think there's a lot more to go and a lot more to prove as a company as a product, and I think one thing that I think I have spoken about this before is I, for us or for myself, I truly believe in a high conviction product for our investor base potential investor base.

And I think what happened over the last five to 10 years is we have increased, increasingly see a lot of disruption from passive trackers. And I think rightly so they should be taking share from the active managers, because many active managers have not done well. Many active manager have been running overly diversified portfolio with not a lot of performance. And I think a lot of them ended up to be underperforming, then I think, people, some people have just taken the view that maybe we should go with trackers, we should just go with ETF that we should just forget about the active managers.

And I think what we're trying to do here is, we want to show that if you have got the right ingredient running high conviction portfolio, doing all the research in house being really focused, then at least we can offer the investor the significant outperformance potential, obviously, we do get it wrong as well.

And we do believe that there's a role for passive, but ultimately, passive track of would never outperform the market. But equally if you don't invest it into high conviction portfolio, which we believe into, then unlikely you're going to get significant outperformance if you get it right. And so I think over time that if we could probably continue to do well, then we could demonstrate the market. There's a role for active managers, but it's not my every active strategy. I think the last one about product. I mean, that been some speculation or we have consider maybe doing Investment Trusts at some point. I think the the timing is not imminent, because one of the things that the same thing, as we talked about about investment is you need to be quite focused.

And obviously we are interested but it's not like we want to be distracted. And when we're ready, then and if there's enough interest, and we might consider it, it's going to be different. I mean, I'm sure some of your audience here would be keen for Investment Trust rather than open ended. But at the moment, we're still relatively small or new to the market. So So over time, that I think is something that we will consider.

Perer Higgins 52:13

Thank you for your candid reply. I really appreciate that. Stephen, now you took the outperformance and over performance, we've not touched on the metrics. And I will add this last question then to show the outperformance of your fund, how it's exceeded the peers and what it's done since inception, just share those metrics with me please?

Stephen Yiu 52:30

Yeah, so I think I have the caveat at that recently, we have given back a lot of performance if you've seen what happened in the stock market, or if it follow the NAV of the fund. But before the recent sell off, I mean, maybe just two months ago, that we have managed to deliver in the range of five to 10% better than majority of our competitors.

So in the UK space, you probably would be using the IA global, which is the average performance of about 2-300 funds, global funds in the market. And over time, we want to do at least five to 10% better than our peers. And I think we've managed to do that until recently.

And I think even you include the recent sell off, we are still just short of about 5%. So we we don't deem that performance to be acceptable because I think that is not what we try to achieve. But then sometimes I think the stock market could be quite volatile.

But then if you look at a long term trend, I think five to 10% is what we expect that we can do better than what the general stock market could achieve.

Peter Higgins 53:32

Thank you, Stephen. That was Stephen Yiu. Xiè xiè Stephen for sharing your investing insights and wisdom with London South East investing Matters global podcast audience an absolute pleasure speaking to you, Stephen. Thank you ever so much.

Stephen Yiu 53:34

Thank you, Peter.

LSE 53:50

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