Analysis-Nvidia investor dilemma: how much is too much in a stock portfolio?

By David Randall

NEW YORK (Reuters) – Outsized positions in artificial intelligence darling Nvidia (NASDAQ:) have boosted portfolio managers’ returns this year but the bets stand to magnify risk if the chipmaker’s red-hot shares see a reversal of fortune.

Nvidia shares are up about 785% since the start of 2023 and have risen some 160% this year alone, boosted by demand for its chips, seen as the gold standard in the AI field. Nvidia briefly became the world’s most valuable company in June before a dip in its shares returned that title to Microsoft (NASDAQ:).

Asset managers’ holdings of the chipmaker have swelled alongside its stock price. Morningstar data showed that 355 actively managed funds held Nvidia positions that totaled 5% or more of their assets at the end of the first quarter, compared to just 108 funds in the same period last year. Funds can maintain large positions in a single holding for a variety of reasons, whether to maximize profits or to track a stock’s weight in an index to which the fund is benchmarked.

“There’s a mindset among some portfolio managers that they missed the boat on Apple (NASDAQ:) or Microsoft and they don’t want to be wrong on AI,” said Jack Shannon, a senior Morningstar analyst. “They don’t want to sell.”

The oversized positions in Nvidia are another example of how investors have cast their lots with a handful of massive growth stocks, leading to one of the most concentrated market advances ever. Nvidia alone has accounted for around a third of the S&P 500’s nearly 17% gain this year, according to S&P Dow Jones Indices.

Overall, markets are the third-narrowest since 1986, with only 24% of stocks in the outperforming the index in the first half, according to BofA Global Research strategists.

Funds that owned Nvidia have so far reaped the benefits. Actively-managed U.S. equity funds that held the stock were up 16.3% on average over the first six months of 2024, compared with an average 5.7% return among those that did not own Nvidia, Morningstar data showed.

Yet concentration in a single stock can hurt investors if Nvidia shares hit a rough patch. While the average price target for the stock among analysts stands at $133.45, some 3% above its current level, according to LSEG data, some market participants point to increasing competition, an expected balance between supply and demand as Nvidia ramps up production, and the company’s rich valuation as possible reasons for a downturn.

The stock trades at 39.3 times forward earnings, about 50% more than its industry median, according to LSEG.

“Does having 6% or more of your portfolio in one stock create outsized risks? The answer is obviously, yes,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:). “The fact that one stock did take off like a rocket ship doesn’t mean that it was smart … to have that many eggs in one basket.”

Investors got a taste of how concentrated positions can be a two-way street last week, following a sharp, one-day rotation out of Big Tech stocks sparked by cooler inflation data. Nvidia fell nearly 6% on Thursday, its biggest daily drop in more than two weeks, while the tech-heavy lost about 2.2%. Both pared those losses the following day.

‘TWINGE OF REGRET’

Technology-sector funds overall have the largest weightings in Nvidia, with four Fidelity funds each holding more than 18% of their assets in the stock, according to Morningstar. Yet other, more diversified, funds appear to be taking on similar risks, with the Baron Fifth Avenue Growth fund holding nearly 15% of its portfolio in Nvidia and the Fidelity Blue Chip Growth fund holding about 13% of its portfolio in the stock. Both firms declined to comment.

Anthony Zackery, a portfolio manager at Zevenbergen Capital Investments, has owned Nvidia since 2016 and continues to maintain a core position, though he has trimmed it periodically to keep within his firm’s risk-tolerance guidelines. The fund can hold as much as 13% of one stock in growth portfolios to keep in line with weightings in its benchmark, the Russell 3000 Growth Index.

“This is a company that is at the forefront of the next trend in technology,” he said.

Some who sold out entirely, on the other hand, wish they had held on longer.

Kevin Landis, chief investment officer at Firsthand Capital Management, said he was “prudent” and took profits in 2020 in a Nvidia position he owned for several years. Still, he can’t help thinking about the gains he missed out on.

“I can’t look at any of my screens now without feeling a twinge of regret,” he said.