Terry Smith defends not keeping Nvidia in Fundsmith Equity, even though it costs investors better returns

Terry Smith has defended his decision not to add Nvidia to Fundsmith Equity’s portfolio, despite the fund having underperformed the benchmark since January.

In a letter to shareholders, the industry veteran said the fund was up 9.3 percent in the first six months of the year but still underperformed the MSCI World Index, which returned nearly 13 percent.

“A 9 percent increase in value in a year would be in line with the long-term average for stocks, so 9 percent in half a year would normally be cause for celebration, except, of course, that it is lower than the index,” he said.

Instead, returns have been concentrated in a few stocks, with nearly half of all S&P 500 returns coming from Amazon, Apple, Meta, Microsoft and Nvidia.

Fundsmith Equity owns three of the five stocks and has overweight positions in Meta and Microsoft, while saying its stake in Apple “remains small as we patiently wait for the share price to reflect the company’s current trading.”

A quarter of all returns came from Nvidia, which had a blistering start to the year after demand for its chips soared.

Despite a $577 billion write-down last month, Nvidia’s share price is up 166 percent so far this year.

Other funds have doubled down on Nvidia. The Blue Whale Growth fund, managed by Stephen Yiu, now has the chipmaker among its top 10 holdings.

Yiu recently told the Mail on Sunday: “We have long thought that Nvidia would become the most valuable company in the world… by overtaking Microsoft, it has now achieved that remarkable milestone.”

Smith isn’t so sure, telling investors: “We don’t own any Nvidia because we have yet to convince ourselves that its prospects are as predictable as we’re looking for.”

‘Without owning these stocks, and indeed all five in at least one index weighting, it was difficult to achieve outperformance.’

Novo Nordisk was the top performer in Fundsmith’s portfolio, up 3.4 percent, followed by Meta, Microsoft and Alphabet, which contributed 2.7, 2 and 1 percent respectively.

Consumer brands L’Oreal, Nike and Brown Forman were among the biggest detractors.

Pet care company Idexx also suffered in the first half of the year, contributing a loss of 0.6 percent.

“The drop in pet owner visits to veterinarians after the pandemic splurge and problems in the Chinese economy explain most of the problems and leave us with little concern about the long-term outlook for most of these companies,” Smith said.

“In at least one case, the problem is probably not the business but the management.”