The energy sector is in the spotlight. Which funds have made a fortune from Nvidia holdings? Who lost out in this game? Let's take a look at the winners and losers of this round of investment competition.
Artificial intelligence chipmaker Nvidia's (NVDA.O) market value surpassed $3 trillion in the second quarter. Since microchips are made of silicon, it's easy to think that Nvidia's entire market value is built on sand. But nothing is more steadfast than Wall Street's belief in artificial intelligence. Nvidia's stock has surged 37% in the past three months and is up nearly 200% in the past year.
The question for fund managers now is whether this is a bubble. Consider that Nvidia’s $3 trillion market cap exceeds the $2.3 trillion national net worth (all assets minus all liabilities) of Sweden, a country of 10.5 million people. It’s almost as large as Africa’s 2023 GDP of $3.1 trillion. Nvidia has 29,600 employees, and each of them is now worth more than $100 million.
Most funds that avoided or underweight Nvidia and other AI-related stocks lagged over the past quarter, while funds that overweighted these stocks outperformed. As a result, the ProFunds Semiconductor UltraSector fund was the best performing mutual fund of the quarter, up 31% and up 108% for 2024. The best performing exchange-traded fund of the quarter was the Direxion Daily NVDA Bull 2X Shares, up 69% and up more than 300% for 2024.
Anyone who believes this hot streak can continue indefinitely may need to examine their mindset.
According to Morningstar data, Vanguard Wellington, a $111 billion balanced fund, first established a position in Nvidia in March. Although it only accounts for 1.5%, it is one of the top 10 holdings, which is a large position for this highly diversified fund. It is also historically significant.
Daniel Pozen, who manages the fund's equity arbitrage, made a conscious shift away from the fund's previously value-oriented strategy. Nothing represents growth more than Nvidia, and Pozen admitted in the fund's November 2023 annual report that Nvidia's absence "hindered relative returns." The fund has outperformed its peers this year and quarter in part because of that shift.
T Rowe Price Capital Appreciation, managed by David Giroux, the best balanced fund manager, has already begun reducing its holdings of Nvidia shares, reducing its holdings by 26% in the first quarter of 2024. In the fund's latest annual report letter in December, Giroux noted: "While we own Nvidia today, the range of potential outcomes is quite large, and in our view, this is not the best risk-adjusted way to play AI from now on." He is worried that competitors will cut into Nvidia's profit margins. The fund's latest disclosed Nvidia weighting is 1.9%. So far, the Capital Appreciation fund is still ahead of its peers, up 7.1%, while the moderate allocation fund has gained 6.6%, but it lags behind the Vanguard Wellington fund's 8.2%.
The diversified stock funds most affected by the AI boom are large-cap growth funds, which are up 4.9% on average this quarter and 17.6% so far in 2024. The best-performing mutual fund in this category this quarter is HCM Tactical Growth, up 11.6%, but its high 2.63% expense ratio and frequent use of ETFs such as ProShares Ultra QQQ for leverage are too risky and overpriced for most investors.
More interesting is the $32 billion Fidelity OTC fund, which returned 10.4% last quarter. Its Nvidia weighting increased from 8.7% on April 30 to 10.8% on May 31. That’s more than the weighting of every active growth manager’s thorn in the side, the $285 billion Invesco QQQ Trust, which tracks the Nasdaq 100 and holds 7.9% of Nvidia shares. Fidelity OTC is one of the few large growth funds that can compete with the Nasdaq 100 ETF over the long term. It’s triumphant this year, up 24.9% while the Nasdaq 100 ETF is up just 17.3%. However, Fidelity still lags behind the QQQ’s surreal 10-year annualized return of 18.7%, with a return of just 17.9%.
Perhaps more attractive than Fidelity OTC is the $76 billion Vanguard Primecap fund, which reopened to new investors this quarter after being closed for 20 years. Morningstar categorizes it as a large-blend fund, even though it's more of a growth fund. The fund has only a 1.8% weighting in Nvidia, but it's been a good performer lately because of its 12.7% weighting in Eli Lilly (LLY.N). Eli Lilly has surged on its diabetes drug Ozempic, which anyone who can afford it buys to lose weight.
Like Fidelity OTC, Vanguard Primecap has been a long-term outperformer fund, but it also hasn't been able to keep up with the returns of the QQQ ETF. Primecap has experienced $3.5 billion in outflows over the past year, according to Morningstar. If you're a fan of Nvidia, QQQ might be enough to keep you invested, as are other cheap growth ETFs, like the iShares Russell Top 200 Growth, 11.9% Nvidia, or the more diversified Vanguard Growth, 10.6% Nvidia. Alternatively, you can just buy the stock directly.
A common saying among Wall Street professionals is to never fall in love with a stock. There are many fund managers in fund history who have bet on a stock and lost everything. The most famous one is probably Robert Goldfarb of Sequoia Fund, who took a huge position in Valeant Pharmaceuticals, but the company never recovered.
Maybe investors shouldn't let Nvidia become their nightmare, either. Other categories of funds also performed well: Indian stock funds rose 9.3% this quarter; precious metals rose 6.2%; and even utility funds rose 3.5%. For a stock like Nvidia, it's hard to find a better diversification tool than a utility fund.
The article is forwarded from: Jinshi Data