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Why the Nvidia effect is bad news for active fund managers

Active managers have underperformed in 2024 as large-cap US equity funds lag the S&P 500

Nvidia has soared 25 per cent, overtaking Microsoft as the world’s second-most valuable company. Photograph: Ritchie B Tongo/EPA
Nvidia has soared 25 per cent, overtaking Microsoft as the world’s second-most valuable company. Photograph: Ritchie B Tongo/EPA
Proinsias O'Mahony's picture
Proinsias O'Mahony
Mon Oct 14 2024 - 05:00

AI giant Nvidia is flying again, soaring 25 per cent over the last month and overtaking Microsoft as the world’s second-most valuable company. That’s good news for shareholders, but not for most active fund managers.

Active managers have underperformed in 2024, lagging the S&P 500. That’s not strange – higher fees associated with active funds means they inevitably underperform most of the time. However, 2024′s underperformance is acute, with the average active large-cap US equity fund lagging the S&P 500 by 2.1 percentage points.

Why?

Active managers usually underweight the biggest stocks in an index. Accordingly, they usually lag when the biggest stocks do especially well. 2024 is one such year, with mega-cap tech companies leading the market higher.

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Having gained 175 per cent already this year, Nvidia is out on its own when it comes to mega-cap outperformance. If you have underweighted Nvidia, it becomes nigh-on impossible to match the index. That’s highlighted by UBS data showing Nvidia alone accounts for 1.43 per cent of the aforementioned 2.1 per cent underperformance of US large-cap active managers. It’s hard to beat the index.

For active investors, Nvidia’s astonishing gains are a reminder that missing out on a single stock can have outsize consequences.

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