Terry Smith defends move to shun US technology stock Nvidia

Investment manager Terry Smith has defended his decision to shun US technology giant Nvidia after his fund paid the price for scepticism that the chipmaker could 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 a surge in the semiconductor manufacturer’s stock.

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

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

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

Smith said his fund did “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 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 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 owner Meta, Microsoft, Alphabet and 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 maker Brown-Forman and software group Waters.