Watch out Fundsmith. I think LF Blue Whale Growth Fund is out for your crown!

Terry Smith’s Fundsmith Equity Fund is one of the most popular quality/growth funds in the UK and rightly so based on its performance. Boasting an annual return of 18.4% since inception in 2010, Smith’s simple-yet-highly-effective approach has likely made many early investors very wealthy.

This is not to say, however, that the Fundsmith team can afford to relax. Assuming it is able to maintain the performance it has shown so far, I think the LF Blue Whale Growth Fund managed by Stephen Yiu could become a rival to their crown in the future.

Top growth fund

Like Smith, Yiu and his team attempt to grow holders’ money by investing in high-quality companies trading at “attractive” prices. Microsoft, Facebook and Visa are all big holdings in the fund.

Like Smith, Yiu also favours a high-conviction approach, holding only 25 to 35 stocks at any one time. As the former has shown, this level of concentration can turbocharge returns as long as the chosen few perform as hoped (the opposite is always a possibility, of course). That’s exactly what has happened in the three years Blue Whale has been around for. 

By the end of August, the growth fund had returned a stunning 75.9% since it was launched on September 11 2017 (or 21% annualised). In 2020 to date, the share price is up 23.4%. This compares favourably to Fundsmith’s still-really-rather-good 13.1%.

These numbers look even better when compared to Blue Whale’s sector (IA Global Average). This has returned 25.7% since the former’s launch or 8% annualised. Out of interest, the FTSE 100 is down 20% over the same three-year period, highlighting how rewarding it can be to deviate from indices. 

But let’s not get carried away. The £520m of assets under management at Blue Whale is a drop in the ocean compared to Fundsmith’s £21.5bn. Yiu has clearly got his work cut out if he’s to get anywhere near the size of the rival fund in a few years.

There are a few other things worth mentioning to would-be investors. 

Before you buy

First, a three-year track record is still too short to be able to make a definitive judgement on Yiu and his team. Investing is about the long game. The best managers prove their worth over many years, often decades. This growth fund is just getting started.

Another thing worth highlighting is that 72% of Blue Whale’s portfolio is made up of US-listed stocks. Fundsmith has 68% exposure. The fact that valuations over the pond are once again looking frothy could prove problematic in the event of a significant second coronavirus wave later this year.

Third, one must always remember that having someone else invest on your behalf incurs fees that ultimately eat into returns. At 1.14%, this growth fund’s annual fee is undeniably high. Remember that an investor can gain exposure to the S&P 500 index via a cheap exchange-traded fund, albeit without the tilt towards ‘quality’. These have ongoing charges as low as 0.07%. Anyone choosing this option over recent years would still have done very well. 

Why choose?

Caveats aside, I suspect the performance of Blue Whale to date will lead to more investors gravitating towards it. There is, after all, nothing to stop anyone from building a diversified portfolio containing a mixture of active and passive funds, as well as their own stock picks.

Blue Whale or Fundsmith? Why not both?