If you’re after a top-performing global growth fund Fundsmith Equity (B41YBW7) is one of the biggest and most popular with retail investors. Terry Smith’s simple investment premise of buying great companies on reasonable valuations, then ‘do nothing’ makes it a classic low maintenance, buy and forget investment.

It has beaten its investment Association (IA) Global category in every one of the past five years, delivering a 142.5% return, nearly double the IA Global performance (75.7%), according to Trustnet data.

But there are alternatives within the global space, and one in that really stands out to us is the Blue Whale Growth (BD6PG78) fund, whose 68.7% performance since being set up a little over three years ago beats even Fundsmith’s impressive 51.2% return.

The IA Global category average was 26%.

Launched in September 2017, Blue Whale’s performance has raised eyebrows in investment circles and drawn a loyal following of retail investors to its portfolio. Run by lead manager Stephen Yiu, and assisted by co-manager Daniel Allcock and a small team of inhouse analysts, the fund’s own investment philosophy is, like Fundsmith, deceptively simple; invest into high quality businesses at attractive prices.

Like its better-known, much larger peer, Blue Whale concentrates first and foremost on identifying quality stocks capable of producing sustainable growth over years, five or more typically. Beyond the capability to put up above average growth year after year, investee companies must also demonstrate profit excellence.

This is typically measured by investment criteria such as return on capital employed (ROCE), return on equity (ROE) and free cash flow (FCF) plus a host for others.

The fund likes companies with strong competitive positions, good management teams that are able to leverage structural growth drivers, such as digital transformation, cloud computing, online payments and robotics and automation.

This is evident from its current top stakes, including engineering software firms Autodesk and Dassault Systemes, medical technology companies Boston Scientific and Stryker, plus more household names like Mastercard, Microsoft and Facebook.

For example, creative digital design technology firm Adobe (currently Blue Whale’s largest stake), the firm behind PDF document technology, has a long run history of gross margins above 85%, 30%-odd operating margins, and improving ROE (29.7% in 2019) and return on invested capital (21.9% in 2019).

This year (to December 2020) Adobe is forecast to post rough 15% revenue growth, hugely impressive given the fallout from Covid, while FCF is expected to top $5 billion.

But while its top 10 stakes may make it look like a tech fund, it is not. The high proportion of technology stocks in the portfolio simply corresponds to the team seeing many of the best quality growth opportunities in technology stocks. If that changes, so will the portfolio make-up.

Straightforward the fund’s investment philosophy may be, but it involves hard graft too. Blue Whale’s team do all their own research, eschewing broker notes and the like and instead applying rigorous, scientific analysis of its own. While that makes it stand out from most other global growth funds, another style point it does share with Fundsmith is its concentrated portfolio.

The Blue Whale fund typically operates with around 25 stocks in the fund, chiming with Fundsmith’s 20 to 30 target scale. While that may sound less diversified that some investors might like, the advantage is that it gives the Blue Whale investment team far more time to spend on each stock.

This means getting to know every company in the portfolio intimately, giving the fund the chance top up on bargains and top-slice full valuations, as it did in July when it sold a large chunk of its Amazon stake.

Investor costs are competitive if slightly higher than Fundsmith. Ongoing charges run at 1.14% versus Fundsmith’s 0.95%, a function of the scale advantages of the larger fund. We believe Blue Whale is a fantastic, slightly under the radar investment option for those taking a long-term view.

Blue Whale’s investment lens

  - High-quality large and mega-caps at an attractive prices.

  - Companies with strong competitive positions and good management teams.

  - Exposed to structural growth drivers. 

  - High return on invested capital, equity and cash flows.

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