By David Randall
NEW YORK (Reuters) – Outsized positions in artificial intelligence darling Nvidia have boosted returns for portfolio managers this year, but the bets will only increase risks if the chipmaker’s share price turns around.
Nvidia’s shares have risen about 785% since the start of 2023 and are up about 160% this year alone, fueled by demand for its chips, which are seen as the gold standard for AI. Nvidia briefly became the world’s most valuable company in June before a drop in its stock handed that title back to Microsoft.
The chipmaker’s asset managers’ holdings have risen along with its stock price. Morningstar data showed that 355 actively managed funds had Nvidia positions totaling 5% or more of their assets at the end of the first quarter, compared with just 108 funds during the same period last year. Funds may hold large positions in a single holding for a variety of reasons, whether it’s to maximize profits or to track a stock’s weight in an index to which the fund is benchmarked.
“There’s a mentality among some portfolio managers that they missed the boat with Apple or Microsoft and they don’t want to be wrong with AI,” said Jack Shannon, a senior analyst at Morningstar. “They don’t want to sell.”
The outsized positions in Nvidia are another example of how investors have placed their fate in a handful of huge growth stocks, creating one of the most concentrated market moves ever. Nvidia alone accounts for about a third of the S&P 500’s nearly 17% gain this year, according to S&P Dow Jones Indices.
Markets overall are the third narrowest since 1986, according to strategists at BofA Global Research. Only 24% of stocks in the S&P 500 outperformed the index in the first half of the year.
Funds that held Nvidia have reaped rewards so far. Actively managed U.S. stock funds that held the stock rose an average of 16.3% through the first six months of 2024, compared with an average return of 5.7% among funds that didn’t own Nvidia, Morningstar data shows.
Still, concentration in one stock could hurt investors if Nvidia shares hit a rough patch. While the average price target for the stock among analysts stands at $133.45, about 3% above current levels, some market participants point to increased competition, an expected supply-demand imbalance as Nvidia ramps up production and the company’s rich valuation as possible reasons for a downturn, according to LSEG data.
According to LSEG, the stock is trading at 39.3 times expected earnings, about 50% more than the sector average.
“Does having 6% or more of your portfolio in one stock create excessive risk? The answer is of course yes,” said Phil Orlando, chief equity market strategist at Federated Hermes. “Just because one stock took off like a rocket doesn’t mean it was smart … to have so many eggs in one basket.”
Investors got a taste of how concentrated positions can be a two-way street last week after a sharp, one-day rotation out of Big Tech stocks sparked by cooler inflation data. Nvidia fell nearly 6% on Thursday, its biggest daily drop in more than two weeks, while the tech-heavy Nasdaq 100 lost about 2.2%. Both recovered those losses the next day.
‘REGRET OF REGRET’
Technology funds generally have the largest weightings in Nvidia, with four Fidelity funds each holding more than 18% of their assets in the stock, according to Morningstar. Still, other, more diversified funds appear to be taking similar risks, with the Baron Fifth Avenue Growth fund holding nearly 15% of its portfolio in Nvidia and the Fidelity Blue Chip Growth fund holding about 13% of its portfolio in the stock. Both firms declined to comment.
Anthony Zackery, a portfolio manager at Zevenbergen Capital Investments, has owned Nvidia since 2016 and still maintains a core position, though he has trimmed it periodically to stay within his firm’s risk tolerance guidelines. The fund can hold up to 13% of any one stock in growth portfolios to stay in line with the weightings in its benchmark, the Russell 3000 Growth Index.
“This is a company that is at the forefront of the next technology trend,” he said.
Some who sold out, on the other hand, wished they had held on longer.
Kevin Landis, chief investment officer at Firsthand Capital Management, said he was “cautious” about taking profits in 2020 on an Nvidia position he’d held for several years. Still, he can’t help but think about the gains he missed out on.
“I can’t look at a screen now without feeling a pang of regret,” he said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Rod Nickel)
