It’s hard to keep up with indices if you don’t own Nvidia, as proved by UK fund manager Terry Smith’s current woes.
“Woes” may be overstating it – the man dubbed Britain’s answer to Warren Buffett saw his flagship Fundsmith fund gain 9.3 per cent in the first half of 2024. Nevertheless, he lagged his benchmark, with the MSCI World Index gaining 12.7 per cent in sterling terms.
Smith is essentially a value investor, but he’s not averse to owning growth stocks, as evidenced by a portfolio containing Apple, Microsoft, Alphabet, Meta, and Novo Nordisk.
Unfortunately for him, he doesn’t own the one stock responsible for nearly a third of the S&P 500′s year-to-date returns: Nvidia.
Smith is not alone in failing to keep up. Most fund managers underperform benchmark indices, but 2024 is proving especially difficult – Morningstar data shows just 18.2 per cent of US active managers outperformed in the first half of 2024. Smith notes that in sterling terms, just five companies – Nvidia, Microsoft, Apple, Amazon and Meta – were responsible for almost half the S&P 500′s gains. If you didn’t own them – or if you only owned three of them, as Smith did – you underperformed.
Severe market concentration leaves fund managers in a quandary. Not following the crowd is all very well, but underperformance runs the risk of being fired or seeing frustrated investors pulling their money.
Indeed, Smith’s fund has suffered significant outflows in recent years, despite his stellar long-time record (Fundsmith is up 610 per cent since 2010, compared with 240 per cent for its benchmark). Little wonder, then, that many fund managers chase stocks higher – even when they think valuations are bubbly.
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