"Follow the Money": Stephen Yiu's Strategy for the AI Era

Blue Whale Growth Fund manager Stephen Yiu explains his approach by tracking spending in three areas: consumers, businesses, and governments.

"Our investment philosophy is simple," says Stephen Yiu, manager of the Blue Whale Growth Fund. "It's basically: follow the money."

The world economy runs on three kinds of spending: households buying things, businesses investing, and government outlays. Invest in companies positioned to capture additional money from at least one of those sources.

That approach shapes the portfolio Blue Whales holds at any given time, wherever opportunities appear without tight restrictions. Yiu has kept a large position in technology stocks for several years, though he is clear that technology is not his main investment focus.

He's looking for companies backed by favorable long-term forces. Those forces shift, and investors who fail to adjust can get caught off guard.

On the BFIA Talks podcast, available across podcast platforms and YouTube, he reflects on how much things have changed since the business began in 2017. "If I go back in time when we first started in 2017, the leadership - the companies that end up receiving money - are very different," he says. Consumer spending had been much stronger during the 10 years up to 2022, supported by low interest rates and inflation, the gains from globalisation, and relatively little geopolitical uncertainty.

Companies that rely on consumer spending are facing a tougher situation now.

Selling software, buying hardware

Since then, technology - and, more recently, artificial intelligence - has benefited from increased spending. Blue Whales' holdings have shifted as the tech sector's winners and losers changed.

"Investors need a clear rule for when to sell: if a company's ability to earn money could be disrupted, it may be time to move on," says Yiu. About two years ago, he followed that rule and sold the software stocks that had formed a major part of his fund's portfolio during its early years.

These companies had become highly appealing after replacing one-off software licenses with subscriptions, which brought in recurring revenue. Switching to a different provider often cost so much that users remained locked in.

Many investors treated technology companies as likely AI winners. Blue Whale saw the opposite risk: "AI is actually a big risk to the moats of software companies," since it could make rival products easier to build and allow smaller firms to create their own systems.

So, although the fund remains heavily invested in technology, most of its exposure now comes from hardware companies benefiting from surging demand for chips and other components that drive the AI boom.

Structural changes

The fund is also adding stocks that stand to gain from physical shortages. That shift may seem unexpected given its reputation for owning high-quality growth companies.

Blue Whale now owns an oil and gas producer and, more recently, a refiner. The move reflects its expectation that conflicts and geopolitical tensions will keep oil and fuel prices high - an example of what Yiu calls a shift in the investment regime.

The fund also invested in a European defence company, expecting government spending on the sector to remain structurally higher.

"Before 2022, European defence companies attracted almost no interest," he says. Defence spending largely followed Europe's nominal GDP, which had performed poorly for many years.

Capital is flooding into the sector as the underlying picture improves. Growth is quicker, balance sheets are healthier, and government clients may be less demanding. "Then you look at returns, margins, shareholder gains and free-cash-flow conversion - it's all completely changed."

Bottom-up, not top-down

Blue Whale considers top-down forces such as geopolitics when judging a company's prospects. But, as Yiu explains, its investment work starts at the company level: what do those forces mean for its ability to earn money?

"That's a major part of the firm's edge over other investors," he says. Blue Whale invests in very large companies, after all, so every investor can access the same basic information. Meetings with management are limited and rarely provide an advantage.

Start with the basics: do you understand the business - or the ecosystem - better than the market does?

About the podcast

BFIA Talks explores practical ways to manage money, invest wisely, and build wealth. Editors Kaylie Pferten, Kaylie Pferten, and Kaylie Pferten speak with guests ranging from CEOs and entrepreneurs to economists and fund managers, who share their advice on achieving financial success.

Follow the BFIA Talks podcast to build confidence in making, keeping, and spending money. Episodes are also available on our YouTube channel.

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