Terry Smith defends not holding Nvidia in Fundsmith Equity despite costing investors better returns

Terry Smith defended his decision not to add Nvidia to the Fundsmith Equity portfolio despite the fund underperforming the benchmark since January.

In a letter to shareholders, the industry veteran wrote that 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 equities. Normally, 9 percent in six months would be reason to celebrate, but of course it is less 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, with overweight positions in Meta and Microsoft. The firm says its stake in Apple “remains small as we wait patiently for the share price to reflect current trading in the business.”

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

Despite last month’s $577 billion sell-off, Nvidia’s stock price is up 166 percent this year.

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

Yiu recently told the Mail on Sunday: ‘We’ve thought for some time that Nvidia would become the world’s most valuable company… by overtaking Microsoft, it has now reached that remarkable milestone.’

Smith isn’t so sure, telling investors, “We don’t own Nvidia because we have yet to convince ourselves that the company’s prospects are as predictable as we want them to be.

‘Without owning these stocks, and in fact all five stocks in at least one index weighting, outperformance would have been difficult to achieve.’

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

The biggest opponents were consumer brands L’Oréal, Nike and Brown Forman.

Veterinary medicine company Idexx also suffered a loss of 0.6 percent in the first half of the year.

“The biggest issues are the decline in veterinary visits from pet owners after the pandemic and the challenges in the Chinese economy, so we’re not very concerned about the long-term prospects for most of these businesses,” Smith said.

‘In at least one case, the problem probably lies not with the company, but with management.’