Timing when a stock will surge is notoriously tricky but so too is getting the position size right to profit from the movement.
With Microsoft, Apple, and Nvidia making up such a large part of the major indices (over 4% apiece of the MSCI World as of 31 May), active managers need to take substantial positions to keep pace with their benchmarks.
Peter Bates, manager of the T. Rowe Price Global Select Equity fund, invested in Apple in April 2024 with immaculate timing but his position size – 500 basis points underweight versus his benchmark, the MSCI World – weighed on relative performance. “That was a good buy but it still hurt me,” he said.
He initially bought Apple’s shares at $170, calculating a hard downside of $130, a soft downside of $150-160, an upside case of $200 and the best case scenario of $240-250 with an 18-month view.
At that time, Apple’s share price appeared to be on the way down so he did not want to go overweight, but the narrative has changed substantially since.
In the past couple of months, Apple has disclosed plans to embed more artificial intelligence (AI) functionality into its iPhones and talked about partnering with third parties. At a developer conference on 10 June, the company unveiled a range of AI features including writing assistance tools, customisable emojis, integration with ChatGPT and a reboot of its voice assistant Siri.
These developments propelled Apple’s share price from $170 to $228 by 9 July, including a 7% rise the day after last month’s developer conference.
Bates was left kicking himself for not having bought more of the stock. “It's pretty amazing how fast the stock has gone from $170 to $220 and it makes me question, why did I only buy 250 basis points? That's 50 basis points that I've lost in relative performance after doing all this work,” he rued.
“I got very fortunate with the timing and that's the funny thing about this business, where even when you make a good decision, you [ask yourself] why didn't I buy more of it?
“Even when you do a lot of work and you think you know what's going to happen, getting the timing right is fool's gold, so you just hope to be in the game.”
He does not plan to add to the position now, however, because the current share price is so close to his upside target.
Apple’s share price ytd
Source: Google Finance
Before April, Apple was struggling to grow and had not announced any innovative new products for some time, but Bates expected the company to find a way to embed an AI assistant into its iPhones and monetise that.
He sold a consumer stock to fund the position in Apple, which he views as the consumer staple of the tech sector. People tend to upgrade their iPhones every four or five years, so Apple’s sales are easy to predict by looking at volumes four years ago, he noted.
Part of his investment thesis for Apple is how valuable people’s phones are to them. “God forbid if your phone breaks, you immediately buy a new one.”
Apple hasn’t been the only top performer for the Global Select Equity fund, however. Indeed, its top-quartile performance in the IA Global sector over the past year is due to another tech giant, Nvidia.
Performance of fund vs benchmark and sector over 1yr
Source: FE Analytics
Bates bought into Nvidia last summer – having earlier looked at the stock in the autumn of 2022 when he decided to buy Advanced Micro Devices (AMD) instead, which he thought was closer to its valuation trough. Nvidia appeared too expensive, he said, admitting to underestimating its upside case. Six months later, AMD was up 60-70% but Nvidia had risen over 250%.
Bates admitted his mistake and revisited Nvidia, quoting Amazon’s ‘day 1’ culture of making decisions with a clean slate. His decision to buy into the chip designer proved prescient as its share price has risen 213% in the past year to 9 July 2024.
Nvidia’s share price over 1yr
Source: Google Finance
To put the difficulty of this decision into context: Will Low, head of global equities at Nikko Asset Management, also bought Nvidia in August 2023 and described it as “a potential egg in face scenario” given the share price had already doubled.
He was concerned about being accused of index hugging because he was buying one of the largest positions in his benchmark after it had run up significantly.
Performance of fund vs benchmark and sector over 1yr
Source: FE Analytics
The decision paid off as the Nikko AM Global Equity fund, which currently has 6.9% in Nvidia, is a top-quartile performer within the IA Global sector over one and five years.