Keeping pace with indices is a demanding task, particularly if one does not have investment in Nvidia, a fact clearly illustrated by current tribulations faced by UK’s fund manager, Terry Smith. Not owning Nvidia has affected Smith’s potential performance, even though referring to his situation as “tribulations” may be a bit of an exaggeration. His flagship enterprise, Fundsmith, witnessed a respectable rise of 9.3 per cent in the first half of 2024, although it fell short of his set goal, considering the MSCI World Index’s sterling increment of 12.7 per cent.
Smith, often compared to Warren Buffett of Britain, is fundamentally a value investor. He doesn’t shy away from growth stocks, apparent from his portfolio that includes brands like Apple, Microsoft, Alphabet, Meta, and Novo Nordisk. However, lacking in his arsenal is Nvidia, the stock responsible for almost a third of the year-long S&P 500’s returns, a lapse which puts him in a delicate position.
And Smith is not the lone one struggling. More often than not, fund managers fail to match the benchmark indices. But 2024 has been particularly demanding. Stats from Morningstar reveal that a mere 18.2 per cent of US active managers managed to surpass their previous performances during the first half of the year. Smith remarks that a handful of companies including Nvidia, Microsoft, Apple, Amazon and Meta, in sterling terms, contributed to nearly half of S&P 500’s improvements. Non-ownership or partial ownership of these stocks led to an underperformance.
This severe market concentration leaves fund managers in a tricky situation. Striving to be unique has its merits, but underperforming threatens job security and risks alienating investment community. Smith’s Fundsmith has experienced considerable withdrawals in recent years, despite his impressive longtime track record (610 per cent gain since 2010, with a comparison of 240 per cent for its benchmark). No surprise then, that numerous fund managers opt to chase soaring stocks, even when they perceive the valuations as frothy.