News 2024-09-06 139

US Active Funds Lag Again, Underweighting Nvidia the Culprit

Active U.S. funds have not outperformed the market this year, with underweighting Nvidia being a key factor. Despite Nvidia being highly favored on Wall Street, many large investors do not have an excessive bullish sentiment towards it.

Nvidia's stock soared yesterday, reaching a high of $124.26 at one point, and closed up 3.32% at $122.80.

Under the spotlight of the surge, some may think that Nvidia's stock is very popular among fund managers, and even need to reduce its exposure when the price rises and brings risk to the stock. However, in reality, compared to Nvidia's weight in the S&P 500 index, many other large technology companies have higher exposure in active funds.

Bank of America Global Research analyst Vivek Arya and his team recently conducted a quarterly review of semiconductor stock holdings in active funds. The results show that although Nvidia is the most held semiconductor stock in active funds, with a holding rate of about 70%, its relative weight is still "low."

Vivek Arya pointed out that Nvidia's relative weight is 0.99 times, far lower than the top 16 highest-held peers in the information technology and communication services industries, and this even occurred when Nvidia's sales growth potential may be five times that of these companies.

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Companies with higher weights than Nvidia include Meta, Salesforce, Microsoft, Alphabet. In the semiconductor industry, companies such as Applied Materials, KLA, and Micron Technology also have higher relative weights.

U.S. active funds that underweight Nvidia have not outperformed the market again this year.

Although many investors and analysts had promised that this year would be a bumper year for active funds, it is incredible that U.S. active funds have once again underperformed the market.

In fact, the performance of these funds this year is not bad. According to UBS data, large U.S. active funds have an average net increase of 20% this year. If this trend continues, 2024 will become one of the best-performing years on record.The issue lies in the fact that, as of last weekend, the S&P 500 index, including dividends, has seen a return of 22.1%. In contrast, actively managed funds have lagged behind by 2.1%, marking the largest shortfall since 2019.

This is normal in the current market environment, as large-cap stocks continue to outperform small-cap stocks. Actively managed funds typically underweight large-cap stocks to avoid having their top ten holdings closely resemble the index. Moreover, when certain specific sectors perform exceptionally well, it can also undermine the annual performance of actively managed funds.

However, in 2024, it is not certain industries, nor even large-cap stocks, that are dragging down the performance of actively managed funds. The main "culprit" is singular: NVIDIA. Since its peak in June, NVIDIA's stock price has been quite volatile and has now fallen by approximately 13% from its high. Actively managed fund managers hope for NVIDIA's stock price to continue to decline, while simultaneously wishing for the overall market to remain strong.

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