Nvidia became the world’s most valuable company last week with a $3.34trn market capitalisation, surging past Microsoft ($3.32trn) and Apple ($3.29trn). Watching Nvidia’s share price almost double so far this year has been either a rewarding or a painful experience for investors and fund managers, depending on whether or not they own shares in the chipmaker.
Victoria Clapham, an investment manager at private client boutique Manorbridge Investment Management, said several of her clients have been asking about whether they should increase their allocations to US mega-cap tech given the sector’s exponential performance.
One particular client inquired about investing in Nvidia recently. Manorbridge uses a combination of stocks, funds and trusts but in this instance, Clapham chose an investment trust to gain exposure to Nvidia at a discount – rather than betting the farm on Nvidia’s top-performing but potentially volatile shares.
“If you’re going to buy tech, buy it at a discount [so] you’ve got a bit of cushioning there,” she said. Clapham is concerned about the high valuations of US mega-cap tech stocks but admitted it is a “quandary” because “it could just keep going up”.
Clapham chose Manchester & London, which has 32.3% in Nvidia and 24.9% in Microsoft (as of 28 May 2024) and is trading at a 10% discount. The trust is fairly concentrated in just two stocks so “you’ve got to know what you’re buying”, she pointed out.
The trust is managed by Mark Sheppard and Richard Morgan at M&L Capital Management. Given its concentration, performance is likely to vary markedly from broader technology indices, they said in the trust’s annual report.
“Should either Nvidia or Microsoft have materially adverse events, or the monetisation of artificial intelligence (/AI) by the sector in general be slower than expected, then the fund will suffer material losses. Humans have a tendency to want everything now,” they wrote.
“The consensus solution to concentration risk is diversification but so often when one does diversify, one has to diversify into lower quality holdings.”
Recent performance has been exponential. The trust, which has a market capitalisation of £318m, delivered a total return of 82.5% for the 12 months to 19 June 2024 in sterling terms. It was the best performer in the IT Global sector by a wide margin, ahead of Scottish Mortgage in second place, up 31.3%.
Manchester & London topped its sector over three and five years as well, although the gap between itself and other trusts was smaller. It came second over 10 years after Scottish Mortgage.
Investors would have been better off buying shares in Nvidia directly, however. Its share price has climbed 216.9% in the 12 months to June 19 in dollar terms. Microsoft’s performance was measly by comparison, up 31.6%.
Over five years, Nvidia is up an eye-watering 3,551.7% in dollar terms. Manchester & London didn’t come close; it returned 86.1% in sterling (87.5% in dollar terms).
Beyond Nvidia and Microsoft, Manchester & London also has 7.8% in Advanced Micro Devices, 6.7% in ASML, 5.9% in Synopsys, 5.6% in Arista Networks, 5.5% in Synopsys, 4.6% in Cadence Design Systems and 4.0% in Alphabet.
Sheppard and Morgan are focussing on ‘hard technology’ (high intellectual property, mission critical, recurring, low churn) rather than ‘soft technology’ (social media and easily created apps, such as food delivery).
Another way to gain exposure to technology at a discount and access some diversification would be through a specialist technology trust.
The £1.5bn Allianz Technology trust and the £4bn Polar Capital Technology trust are trading at discounts of 8.9% and 8.8%, respectively. Nvidia is both trusts’ largest holding, with a 9.6% and 10.4% weighting, respectively.
They are more diversified than Manchester & London, but this means they do not benefit from Nvidia’s stellar growth to the same extent. They produced total returns of 52.6% and 52.2%, respectively, for the year to 19 June 2024.
Performance of trusts over 1yr
Source: FE Analytics
Trustnet recently compared the two tech trusts and asked experts to choose between them.
Shavar Halberstadt, equity research analyst at Winterflood, and Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler Partners, both backed Allianz Technology.
Its manager Michael Seidenberg invests in more off-benchmark names, implying that he has a better chance of beating his benchmark, Lightfoot-Aminoff said.
However, Richard Williams, an analyst at Quoted Data, preferred Polar Capital Technology because it has taken a bigger bet on AI. It holds Advanced Micro Devices, for instance, which should benefit from the insatiable demand for chips and increasing AI infrastructure.
Other trusts trading at a discount that have more than 5% in Nvidia include Scottish Mortgage, Martin Currie Global Portfolio, Canadian General Investments and Baillie Gifford US Growth.