Finance
How much is too much in a stock portfolio?
By David Randall
NEW YORK (Reuters) – Outsized positions in artificial intelligence darling Nvidia have boosted portfolio managers’ returns this year, but the bets will increase risk if the chipmaker’s red-hot shares see a turnaround in fortunes.
Nvidia’s shares are up about 785% since the start of 2023 and are up about 160% this year alone, boosted by demand for its chips, which are seen as the gold standard in AI. Nvidia briefly became the world’s most valuable company in June, before a dip in shares gave that title back to Microsoft.
Asset managers’ holdings in the chipmaker have risen along with the share price. Morningstar data showed that 355 actively managed funds held Nvidia positions that totaled 5% or more of their assets at the end of the first quarter, compared to just 108 funds in the same period last year. Funds may hold large positions in a single holding for a variety of reasons, such as to maximize profits or to track the weight of a stock in an index against which the fund is benchmarked.
“There’s a mentality among some portfolio managers that they’ve missed the boat on Apple or Microsoft and they don’t want to make a mistake on AI,” said Morningstar senior analyst Jack Shannon. “They don’t want to sell.”
The oversized positions in Nvidia are another example of how investors have thrown in their lot with a handful of huge growth stocks, leading to one of the most concentrated market developments ever. Nvidia alone is responsible for about a third of the S&P 500’s nearly 17% gain this year, according to S&P Dow Jones Indices.
Overall, markets are the third-tightest since 1986, with just 24% of stocks in the S&P 500 outperforming the index in the first half, according to strategists at BofA Global Research.
Funds that owned Nvidia have reaped the rewards so far. Actively managed U.S. stock funds that owned 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, data showed from Morningstar.
Still, concentration in one stock could hurt investors if Nvidia stock hits a rough patch. While the average price target for the stock among analysts is $133.45, about 3% above current levels, according to LSEG data, some market participants point to increasing competition, an expected balance between supply and demand as Nvidia ramps up production, and the The company’s rich valuation as a possible reason for a downturn.
According to LSEG, the stock trades at 39.3 times forward earnings, about 50% higher than the industry average.
“Does having 6% or more of your portfolio in one stock create excessive risk? The answer is clear: yes,” said Phil Orlando, chief equity 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, following a sharp, one-day rotation out of Big Tech stocks, fueled 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 made up for those losses the next day.
‘TWINGE OF REGRETS’
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 owning nearly 15% of its portfolio in Nvidia and the Fidelity Blue Chip Growth fund holding about 13% of its portfolio in stocks. Both companies declined to comment.
Anthony Zackery, portfolio manager at Zevenbergen Capital Investments, has owned Nvidia since 2016 and continues to maintain a core position, although he has trimmed it periodically to stay within his company’s risk tolerance guidelines. The fund can hold as much as 13% of a single 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.
In contrast, some who completely sold out wished they had lasted longer.
Kevin Landis, chief investment officer at Firsthand Capital Management, said he was “prudent” and took profits in 2020 on an Nvidia position he had owned for several years. Still, he can’t help thinking about the gains he missed.
“I can’t look at my screens now without feeling a tinge of regret,” he said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Rod Nickel)
