Terry Smith defends move to shun US technology stock Nvidia

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Investment manager Terry Smith has defended his decision to shun US technology giant Nvidia as his fund paid the price for scepticism that the chipmaker can continue growing at a rapid pace.

Returns of Smith’s global fund lagged behind its benchmark in the first half of the year as it failed to benefit from the surge of the semiconductor manufacturer’s stock.

It shows the pitfalls for fund managers, which select shares on anticipation of rising future earnings, that avoid companies such as Nvidia as they question ambitious growth forecasts.

The £25bn Fundsmith Equity portfolio, which focuses on growth stocks, holds stakes in some of the largest US tech firms — Apple, Meta and Microsoft.

But Smith said in his in semi-annual letter to shareholders that he has chosen to avoid chipmaker Nvidia, which last month briefly became the world’s most valuable company, surpassing $3tn.

Smith said his fund does “not own any Nvidia as we have yet to convince ourselves that its outlook is as predictable as we seek”.

The decision also underscores problems of failing to hold large tech “megacaps”, which are dominating the US stock market.

Nvidia, Microsoft, Amazon, Meta and Apple accounted for almost 60 per cent of the S&P 500’s 14 per cent increase in the first half of the year.

Smith said that “outperformance was difficult to attain” in his fund as a result of avoiding Nvidia and not holding enough of the other tech companies.

He added that the fund’s stake in Apple “remains small as we wait patiently for the stock price to reflect the company’s current trading”.

Smith sold the fund’s holding in online retailer Amazon last year, which the fund only began purchasing in 2021, telling investors that he had concerns over potential capital misallocation.

In the first six months to the end of June, Fundsmith Equity returned 9.3 per cent compared with the MSCI World Index’s 12.7 per cent in sterling terms.

The S&P 500 index returned 17 per cent over the period in sterling terms, of which Smith said a quarter came from Nvidia.

Smith said that a return above 9 per cent over six months “would normally be cause for celebration”, but pointed to the strong performance of the world index.

“There’s no question that as an active manager if you don’t own AI stocks you’re probably underperforming [at the moment],” said Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management.

Smith said his top-performing stocks over the period were Danish pharmaceutical company Novo Nordisk, Facebook’s owner Meta, Microsoft and Alphabet as well as American medical devices company Stryker.

However, the fund’s worst-performing stocks included beauty company L’Oréal, pet healthcare business Idexx, sportswear company Nike, spirits and wine business Brown-Forman and software firm Waters.