Firing line: Stephen Yiu

Firing line: Stephen Yiu

Stephen Yiu, managing partner of Blue Whale Capital, has a strong belief in conviction investing. He thinks the problem with many of the larger fund managers is their reliance on teams of analysts, without having done the legwork themselves.

He said: "With these big fund managers, Fidelity and M&G have 20 to 30 analysts supporting the fund manager doing the same work.

"But the problem is that because the fund manager hasn't done the work himself, the level of conviction you have is based on other people's work; it's not going to be the same. Fidelity has 100 analysts sitting in New York, who are all sector specialists.

"The analyst will say, 'I like this stock because it's cheap', and the fund manager will say 'It's very interesting, let's have 1 per cent', but he hasn't done the work bottom up. In order for a fund manager to have a high conviction he needs to do a lot of work himself."

Mr Yiu has just launched his first fund, under the banner of the company name Blue Whale. But it is perhaps better known as the new investment vehicle of Peter Hargreaves, who has put up £25m of his own money to back the venture.

Mr Yiu worked as a fund manager and analyst at Hargreaves Lansdown for five years and has subsequently run money at Artemis and New Star. His approach is to deeply research the stocks he is interested in and take a view on some basic fundamentals.

For example, he likes some technology stocks but not others – Apple he is not a fan of, but Electronic Arts he is. 

He said: "We want to identify good businesses that will have good prospects. We want to invest in a business that will be bigger in a few years' time. The market itself is getting bigger, if they're growing and if their industry is growing, then the company will get bigger. Valuation is also important – we want to buy a business at a good price." This he attributes to Electronic Arts.

Apple, he believes, has an unpredictable future. Mr Yiu said: "The reason it's so cheap is that it's still a hardware company. They're still talking about recurring revenue from iTunes – recurring revenue is the best thing because you get lock-in. If suddenly they come up with a faulty iPhone and people lose interest in the brand then recurring items will decrease. If Apple doesn't come up with a good model you might want to change your provider, then you lose recurring items."

Adobe, on the other hand, he is a much greater fan of, because it has adopted a subscription model. Rather than sell off-the-shelf packages for £300, for example, it locks people in with a regular subscription and updates, so there is more reliable recurring income.

Mr Yiu is taking the approach of investing in about 30 stocks, being "specialist", sitting in the IA Global sector. It is not dissimilar to the approach taken by Fundsmith and Lindsell Train, both of which he will be competing with, although he does not expect to be adopting the buy and hold strategy these two fund managers take.