Funds punished for owning too few Nvidia shares after stunning 230% rally

Nvidia Corp’s soaring rally has thrilled investors this year – except for the sizeable number of fund managers who avoided what they believe to be an expensive stock.

Shares of the semiconductor company – whose chips power generative AI apps such as ChatGPT – have more than tripled this year in a rally fueled by excitement over the prospects for artificial intelligence. Yet many funds hold less of the stock in their portfolios compared with Nvidia’s weight in key equity indexes, making it tougher for them to beat their benchmarks.

Across nearly 330 mutual funds benchmarked to the S&P 500 or a similar index, only 15% held an above-index weight in Nvidia, according to a Morningstar analysis of the funds’ most recent regulatory filings. Among those funds that held a below-average weight in Nvidia, 85% underperformed the index so far this year, Morningstar’s data showed.

Nvidia’s valuation has been a primary reason keeping some investors away, while others are wary of buying in after the stock’s mammoth 230% run this year. The stock currently trades at 33.6 times forward 12 months earnings estimates, compared with less than 24 times for the Nasdaq 100, according to Refinitiv Datastream.

“One stock is not going to make or break us, but it certainly doesn’t help if you don’t own it and the stock triples,” said Chuck Carlson, chief executive officer at Horizon Investment Services.

Horizon, which has $250 million in assets under management, this year has not recommended clients own the stock in portfolios, which typically are between 30 and 35 stocks. The firm currently ranks Nvidia at the bottom of its models in terms of valuation.

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