One of the best-performing technology funds in recent years continues to be a big contrarian when it comes to the market's current biggest star, Nvidia NVDA.
Fidelity Global Technology, Europe's largest tech stock fund, has not held any shares in the semiconductor maker since June 2016, even as the stock has soared on the back of demand for artificial intelligence-driven chips. .
Nevertheless, the $20.6 billion fund's performance under lead manager HyunHo Sohn has ranked among the top 10 among European technology funds over the past decade. During that time, the fund has returned 21.4% annually, compared to the category average of 17.3%, the Morningstar Global Technology Index's 20.9%, and the Morningstar US Market Index's 15.0%. (In the U.S., the average tech stock fund has gained about 16% annually over the past 10 years.)
Nvidia's stock has been on the rise since the company's fourth-quarter results, but Mr. Song remains on the sidelines. “There was nothing in NVIDIA's results that changed my view,” he said in comments provided to Morningstar on February 27th. He believes that the current environment is only the first stage in a long-term build-out of AI infrastructure, and believes that: In the meantime, there are more attractive and valuable ways to invest in this technology.
Here are the stocks Sohn lists as alternative stocks to take on AI over the long term.
- Taiwan Semiconductor Manufacturing TSM
- Samsung Electronics SSNLF
- elastic ESTC
Performance impact of avoiding Nvidia
It's notable that technology funds don't own shares in such powerful companies. The average tech stock fund in this category holds almost 13% of their portfolio in his Nvidia. Fidelity Global Technology's benchmark MSCI ACWI Information Technology Index represents 9.6% of the company's shares. This choice by Sohn, who has managed the strategy since March 2013, is especially striking given the significant rise in NVIDIA's stock price. Stocks are up 60% by 2024, 240% over the past four years, and 67% annually over the past 10 years.
Nvidia's zero weighting has contributed to Fidelity Global Technology's recent weak performance. Over the past year, it ranks in the 53rd percentile in this category (of which there are 335 funds). Over the past 12 months, the fund returned 31%, compared to the Global Technology Index's return of nearly 46%. Still, these revenues gave it an edge over its competitors. The average tech fund rose 29.1%, while the market-wide index rose nearly 25.0%.
Why Fidelity Global Technology doesn't own Nvidia
Fidelity Global Technology owned Nvidia stock from July 2015 to June 2016, which was an exception to the company's rules. In a commentary on the strategy in November, Song explained: But the company itself is in the technology infrastructure, which can be volatile and cyclical, and I think the market is underestimating that. ”
Despite this stance, Son believes AI is a valid investment theme. Many companies are investing in building AI infrastructure, resulting in increased demand in areas such as graphics processing units and AI networks. ”
That said, Song thinks the market is starting to pick up a bit. “In my opinion, AI adoption may be slower than expected,” he says. “People often compare generative AI to his iPhone movement, but while the latter was an innovative consumer product that took off very quickly, generative AI is a business application, with regulatory, compliance, and security issues. , must be considered in parallel with data governance.”
He explains: “That's why, despite all the hype around AI, we haven't seen many companies successfully monetizing it. So this technology can take a while, and That’s one of the risk factors I look at.”
Read more about Nvidia's earnings
Sohn is also unimpressed with Nvidia's impressive recent performance. “NVIDIA has delivered three consecutive quarters of very strong numbers, driven by data center GPU sales. While this quarter's numbers are respectable, they are a departure from the explosive numbers seen in previous quarters. “In fact, the strong sales growth was smaller than the previous two quarters,” he wrote this week.
“Although still beating consensus, NVIDIA's latest results are a reminder of the law of large numbers that expectations rise and eventually converge to a true value, making it increasingly difficult for the company to continue to beat expectations.” ”, he continued. “Final demand is difficult to predict, and other factors such as strategic construction, peer pressure, and supply chain tightness result in rush orders, so it is difficult to predict how large this phase will be. It’s difficult.”
Sohn said, “The first phase of ramp-up will have to be eased at some point because monetization through AI is not growing as quickly. So it's becoming more difficult to digest and monetize. ” he wrote. Furthermore, “to justify current valuations, there are many long-term We need bullish assumptions.”
Other stocks driving the AI trend
“We continue to approach AI themes in a stock-specific manner, looking for undervalued stocks rather than chasing stocks that are already perfectly priced,” said Song. I am.
Areas he is considering for AI exposure include “undervalued hardware” stocks. “If Nvidia continues to perform well, other companies such as Taiwan Semiconductor Manufacturing and Samsung Electronics will also benefit.”
The other group consists of companies in the IT services/software business related to AI monetization. “NVIDIA's revenue is only sustainable if AI is successfully monetized,” he says. “IT services and data companies with the expertise to help customers with their AI efforts” include software company Elastic and cloud computing stock Nutanix NTNX.
Finally, Sohn points out that it is “misleading AI losers, such as digital music businesses and customer service companies, where AI may be less disruptive than expected.”
