Why Blue Oceans?
Don’t expect unusual outcomes by acting in usual ways
We think differently. We think differently to the mainstream investment community in everything we do. We look for investments differently, we value opportunities differently and we manage our portfolio differently.
|Mainstream Wisdom||Blue Oceans Thinking|
|Value opportunities can be found by looking at low PE ratios.||PE ratios are made up of two erroneous metrics leading to an erroneous conclusion. P, the stock price, likely won’t reflect the true value of the company and E, earnings, comes from net income, a calculation for tax purposes and not actual cash flows from the business. We do not consider PE values.|
|WACC is a critical component of valuation.||Risk is directly related to the drivers of price and volume and not the expected return of investors. Why should their collective expectations necessarily be correct? Why would a small cap growing at 30% p.a. with multiple macro tailwinds represent more risk than a large cap growing at 5% p.a. in an industry undergoing widespread disruption? We do not use WACC in valuations.|
|Beta is a true measure of risk.||Again, it is the drivers of price and volume that constitute an investors risk. It is not recent movements in stock price relative to its index or its peer companies. We do not use beta in valuations.|
|The CAPM is essential in calculating the discount rate.||Our focus is entirely on the individual business performance and not the market its stock price is quoted on. We do not recognise significance in expected stock market return, beta, or the market risk premium. If an investor is concerned about short term market movements they are speculating and not investing. We do not use the CAPM in our valuations.|
|The terminal value formula is correct and an essential part of DCF valuation||Calculating WACC including beta on a company today produces a wide margin of error. The calculation estimated many years in the future is nonsense.|
|A portfolio must have at least 30 stocks to be adequately diversified.||Mainstream diversification theory makes exceptional portfolio performance mathematically improbable. Assembling a large portfolio uncorrelated stocks merely creates a replica of the index. We are content in holding 7 – 10 of the best opportunities available and do not follow mainstream diversification theory.|
|A rational investor only holds a portfolio on the efficient frontier.||Levels of variance of expected returns and estimated standard deviations do not combine to provide insight. Our focus remains on the factors concerning the individual business situation. We do not use efficient frontier theory in managing our portfolio or in making purchase decisions.|
|The best talent can be found from the best business schools.||Mainstream wisdom is taught at all leading business schools and so hiring individuals who have excelled at learning and applying that school of thought would diminish our value not increase it.|
|Be aware of and make provision for black swan events.||Unexpected events can occur at anytime causing dramatic market movements and that does not concern us. We stay focused on the performance of businesses in our portfolio and searching for new opportunities. Macro events rarely impact the trading conditions of businesses we own and the effects on their share prices are temporary.|
|If a stock price rises and that company becomes a large part of your portfolio you need to sell a portion of it to rebalance the portfolio so all stocks have much the same weightings thereby reducing risk.||Rebalancing relates to mainstream thoughts on maintaining diversification. Our tolerances are for a much more concentrated portfolio and we allow stocks to grow larger portions of the overall portfolio than mainstream would allow. The risk is in the business model, if that business model is performing exceptionally well we continue to hold our position.|
|Pick an industry that is likely to outperform and buy the best stocks in that industry.||When looking for new investments we scan every company on global listed exchanges. In that way we know which companies have the best performing business models and we are not attempting to choose an individual industry or sector.|
|Buy into cyclical stocks at the bottom and sell them at the top (buy low, sell high).||Frequent trading produces a large tax burden. Timing entry and exit points cannot be done accurately over long time-scales. Commodity industries are prone to complex factors making estimations of future cash flows void. Commodity industries usually do not align with sustainability. We do not invest into cyclical business models.|
|If a company misses guidance, sell it.||Guidance in our view is unnecessary and prone to error. We would rather see managers managing a company to current conditions, not investor expectations.|
|If a company misses analysts expectations, sell it.||The opinions of analysts are irrelevant.|
|Small caps hold greater risk than large caps and should be valued accordingly lower.||In our experience the reverse is more often true. We analyse the risk of small caps and large caps in the same way. We do not believe small caps hold more risk than large caps simply because they are smaller.|
|A capital raising increases valuation.||A company’s value is its ability to generate cash flows and not its popularity amongst investors.|
|Companies can be grouped into sectors and good diversification is spread amongst multiple sectors reducing risk.||Apart from our sustainability criteria we are sector agnostic. Diversity amongst business models in the same sector is immense. The concept of sectors is irrelevant to us.|
|Fund Performance||Total Fees||Made up of|
|Less than 15%||0.9%||0.9% flat fee|
|15% or above||2.4%||0.9% plus 1.5% performance fee|
|35% or above||2.8%||0.9% plus 1.9% performance fee|
How to Invest in Blue Oceans Capital Fund
The fund is not yet launched. In the three years to date the fund has operated privately. We are now inviting you to invest with us and will launch the fund when we receive sufficient expected investment.
If you’re interested in investing in the fund please register your interest here. We’ll contact you when we’re about to launch and keep you informed on progress in the meantime.
Blue Oceans Name
Blue Oceans encapsulates our thinking as it relates to strategy and environmental sustainability. Both core to our values.
With regard to environment, Blue Oceans evokes images of pure waters and sustainability. We see a fundamental link between environmental sustainability and the financial community. Those institutions, as providers of capital, have enormous power to force change if it is their will, and in fact, they have a responsibility to do so.
Blue Oceans as it relates to business strategy is a term coined by Kim & Mauborgne (2005) that describes business models in uncontested markets with new demand, and strong, profitable growth. For us, Blue Oceans Strategy is a mental framework and a methodology for contributing to society in a sustainable way. It assists us to capture value with time compression from ideation to realisation.
Blue Oceans’ strategy is about “building a future where customers, employees, shareholders and society win.” In this way it is aligned with our passion for business to contribute to the betterment of people and to the environment as shown in our ESG focus. As opposed to Blue Oceans, Red Ocean industry boundaries are well-defined and accepted with the rules of the game already known. In Red Oceans, companies try to outperform their rivals to grab a greater share of existing demand. As that market space gets crowded, returns diminish and products become commoditised. Blue Oceans are untapped market spaces where new demand is created and there is opportunity for highly profitable growth. Some Blue Oceans are created in entirely new industries but most are created by expanding industry boundaries into new areas and markets through value innovation within Red Oceans. Here competition is irrelevant because the rules of the game have not yet been set. The focus is on the strategic move that companies make and not the company or industry itself.
Reference: Kim, W. C., Mauborgne, R. (2005). Blue Ocean Strategy: From Theory to Practice. California Management Review, 47(3), 105–121.
Business Value Capture
(mouseover / touch gold hotspots for legend)
Figure A. Conceptual distribution curve of global untapped value creation.