In retrospect, it seems clear the tipping point for AI (artificial intelligence) was the release in November 2022 of OpenAI’s free-to use ChatGPT system.

Until that point, most AI products were being developed privately and weren’t widely available to the public, added to which most were fairly clunky whereas ChatGPT was able to interact in a conversational way, answering questions, challenging incorrect assumptions and admitting its mistakes.

Over the last 18 months the level of excitement, and to be fair the pace of innovation, has caught the sceptics by surprise leaving them scrambling to catch up.

However, for those funds which were early believers in the potential for AI to change the technology landscape, and for their shareholders, the benefits have been manifold.

The poster child for AI is US chip firm Nvidia (NVDA:NASDAQ), which was previously known for its graphics cards developed for high-end gaming but now accounts for 80% of global AI processor sales and is the first semiconductor company to reach a stock market valuation of $2 Trillion.

We have therefore compiled a short list of the funds and investment trusts which have bet big on Nvidia.

TOP THREE FUNDS

Top of the list of open-ended funds with large exposure to Nvidia is the £1.3 billion Janus Henderson Global Technology Leaders (BJ0LFT9) where the chipmaker makes up just under 10% of the portfolio.

Manager Richard Clode says investors need to focus on the fundamentals, not the hype.

‘Even with the continuing hype around AI, unlike in 2020, this time round the return of the cost of capital given the end of the era of cheap funding has meant that we are seeing the market reward companies that are delivering strong fundamentals.

‘As long-established technology equities specialists, this is very much welcome as our experience has proven that share price performance supported by real profits and cashflows are much more sustainable than hype alone.’

Clode is confident the company’s stellar performance is not about to fade any time soon thanks to ‘generational transitions in compute, the breadth of the customer base, ongoing supply constraints, their chip roadmap and the potential to reignite a business in China’.

Zehrid Osmani, a manager well known to Shares readers, is another big fan of Nvidia, with the stock making up more than 9% of both the Martin Currie US Unconstrained Fund (BP9LKG4) and the Martin Currie Global Unconstrained Fund (BYT1LJ7).

Osmani expects Nvidia to continue defying expectations and says we have only seen ‘the tip of the iceberg’ so far when it comes AI.

As an example, he cites the fact that in 2021 the firm thought the total addressable annual market would be $300 billion but within a year it had more than tripled its forecast to $1 trillion.

‘There’s going to be an acceleration of deployment of AI projects over the next two to three years, therefore there is still strong momentum in the near term.

‘It’s important to stay fundamental in your analysis, to stay disciplined on valuation, but based on our valuation framework, we think that companies like Nvidia are not overvalued, far from it,’ says the manager.

‘Nvidia in our view is positioned almost in a similar manner to where ASML (ASML:AMS) was 10 years ago.’

James Dowey and Storm Uru, managers of the Liontrust Global Technology Fund (BYXZ5N7), also have a big bet on Nvidia but they are hedging themselves with a smaller but still top-10 position in rival AMD (AMD:NASDAQ).

The duo believe Nvidia has a strong hardware and software lead over AMD but the latter’s shift to accelerated computing is ‘notable’ and its new chips represent ‘an excellent initial range’ with companies such as Microsoft (MSFT:NASDAQ) expected to use them to build out their data centres and power their co-pilots for Office 365 and Teams functions.

TOP THREE TRUSTS

Way out in front in the investment trust world in terms of exposure to Nvidia is Manchester & London (MNL), with the chipmaker accounting for 25.7% of the £300 million portfolio at the end of February according to the AIC (Association of Investment Companies).

As the trust’s website puts it, the managers believe in ‘the increasing economic power of the machine in the two-century long battle for supremacy between man and machine’ and have constructed ‘strategies to convert this shift in supremacy into investment returns’.

‘We have entered the era of AI,’ say the managers in the trust’s half-year report. ‘We believe we still have a long way to travel down this road and that those that bank quick profits now will rue the day they did so. We are era-long investors, and our portfolio is firmly focused on AI enablers not ‘AI show-boaters’.’

It should be noted the fund is long/short – in other words it not only buys stocks hoping the price goes up, but it also sells them short in the hope the price goes down – and tends to hold very concentrated positions, meaning it is only suited to investors with a strong risk appetite.

The £1.3 billion Allianz Technology Trust (ATT) is next with a 9.9% investment in Nvidia at the end of February, although manager Mike Seidenberg singled out Okta (OKTA:NASDAQ), Monolithic Power Systems (MPWR:NASDAQ) and Amazon.com (AMZN:NASDAQ) as the biggest contributors to the fund’s performance during the month.

‘We are in the early days of the generative AI revolution and there is a lot of learning to be done,’ says Seidenberg. ‘As a result of recent breakthroughs, generative AI is rapidly reshaping how entire industries operate, and driving innovation at an unprecedented pace.

‘As companies move into the intelligence era, AI has the potential to become truly game-changing. From an investment perspective, our process aims to identify the long-term winners and ensure that we have exposure to those winners in some capacity.’

In third place is Polar Capital Technology (PCT) which had a 9.5% holding in Nvidia, making it the second-largest position after its 10.3% position in Microsoft (MSFT:NASDAQ).

Considering the trust had assets of almost £4 billion at the end of last month, that means its Nvidia stake was worth £380 million.

It also has a 4.4% position in Nvidia rival AMD (AMD:NASDAQ), a 2.9% position in Nvidia supplier TSMC (2330:TPE) and a 2.3% position in TSMC supplier SML, so it is invested all the way down the ‘value chain’.

Manager Ben Rogoff described it as ‘remarkable’ that Nvidia’s recent results beat expectations comfortably even while China sales declined significantly due to US government restrictions and capacity at key supplier remained tight.

‘Investor opinions are clearly divided on the impact of AI, even among technology fund managers, with many sceptical about the sustainability of the trend. We believe this is the start of a major new cycle and not the end. The abundance of positive AI news flow, new product/model releases and strongly supportive data points during fourth-quarter earnings season is hard to argue with,’ added Rogoff.

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