It’s fair to say January hasn’t been the best of months for investors. Indications that the Federal Reserve may raise interest rates sooner than expected have sent equities, particularly US-listed tech stocks, into a tailspin.
As scary as such drops can be, I’ve been taking the opportunity to load up on a fund whose performance prior to the start of 2022 had been excellent.
Solid gains
Managed by Stephen Yiu, LF Blue Whale Growth returned 20.8% in 2021, according to its most recent fact sheet. That’s a better return than its benchmark. The IA Global Sector average was 18%. All told, the fund has more than doubled investors’ money in a little over four years.
One reason for this stellar performance is the number of tech-related stocks owned by Blue Whale. These include Microsoft, Adobe and Alphabet. Another relates to just how concentrated the fund is.
Blue Whale’s portfolio is made up of just 27 holdings, almost 73% of which are US-listed firms. You probably don’t need me to tell you any strategy that embraced being overweight in stocks from across the pond paid off handsomely in 2021.
Unfortunately, the first month of 2022 has taken a rather large chunk out of last year’s gains. So the question to ask is whether the current market crash is a great opportunity to buy more.
New bear market?
On the one hand, the recent rout in tech stocks could continue if the Federal Reserve keeps giving out signs that it’s ready to shift its monetary policy. That’s potentially problematic for Blue Whale’s portfolio, given how concentrated (and potentially more volatile) it is.
Regardless of what the Fed does, it’s possible traders will move more of their money into value stocks hit most by the pandemic anyway. Rising tensions in between Ukraine and Russia, while seemingly not all that relevant to the performance of a US-focused fund, could also push investors to the exit as a cautionary measure.
Is this the dawn of a new bear market? It’s entirely possible.
Back quality
Of course, there are reasons to stay bullish too. One argument is that all this will prove transitory. With so many US stocks now at least in correction territory, the worst could already be over. And when we get big sell-offs, the recovery can be just as swift. Thanks to inflation, staying in cash is hardly appealing.
Perhaps the biggest motivation for feeding my money into Blue Whale specifically is its attitude to stock selection. Like rival Fundsmith Equity, Yiu looks for high-quality shares. He also avoids those “at the mercy of cyclical economic gravity“. The fund has a strict approach to valuation too. This means investors don’t need to worry about owning unprofitable story stocks.
Another potential tailwind is Blue Whale’s size. As a relatively young fund with ‘just’ £1bn in assets, Yiu has considerable flexibility in what he is able to buy. I’d be amazed if he hasn’t put some money to work in recent days.
Long-term focus
The reversal in the fund’s fortunes is a reminder of how quickly sentiment can change. So long as I adopt a long-term mentality (not dissimilar to Yiu) while also maintaining a degree of diversification, I’m confident that increasing my investment here will pay off. I’m still backing Blue Whale.
