James Anderson, Nvidia and exponential beneficial properties | Invesloan.com

In today’s newsletter:

• Nvidia could reach $50tn market cap in a decade, says leading tech investor

• Top ECB official sounds alarm on shadow banking

• UK pension plans overpay £1.5bn in fees to fund managers

Nvidia’s ‘most optimistic outcome’

A crucial influence on fund manager James Anderson and his former firm Baillie Gifford’s investment process has been the work of academic Hendrik Bessembinder, a professor at Arizona State University. He found that over many decades just 4 per cent of stocks accounted for all the net wealth creation, providing the basis for their belief that fund managers should seek to identify companies that are extreme winners. 

Exhibit A for exponential progress? Nvidia. In this article, I explore why Anderson thinks the chipmaker could be worth almost $50tn in a decade. To put that in perspective, that’s more than the combined current market value of the entire S&P 500.  

Nvidia is currently the largest position in the new-ish fund that Anderson is running at the Agnelli family’s Lingotto Investment Management. 

The fund manager, best known for his early bets on the likes of Tesla and Amazon, told me:

“The potential scale of Nvidia in the most optimistic outcome is both way higher than I’ve ever seen before and could lead to a market cap of double-digit trillions. This isn’t a prediction but a possibility if artificial intelligence works for customers and Nvidia’s lead is intact.” 

Nvidia has been the chief beneficiary of a boom in demand for chips that can train and run powerful generative AI models such as OpenAI’s ChatGPT. Its chief executive Jensen Huang has declared the company is at the centre of a new “industrial revolution” and the company briefly leapfrogged Microsoft and Apple in June to become the world’s most valuable publicly listed company. 

Nvidia currently trades at more than 47 times its estimated earnings per share for the coming year and is responsible for almost 30 per cent of the S&P 500’s 17.7 per cent gain this year. 

The growing sway of Nvidia and the largest tech “megacaps” over broader stock market indices has provided challenges for fund managers who do not hold them. For example, Fundsmith’s Terry Smith said last week that his global fund lagged behind its benchmark in the first half of the year after choosing to avoid the chipmaker because “we have yet to convince ourselves that its outlook is as predictable as we seek”. 

Meanwhile here my colleague Robert Armstrong explores whether the brave minority of Nvidia sceptics are right. 

The systemic threat from lightly regulated lenders

Elizabeth McCaul was superintendent of banks in New York back in 1998 when Long Term Capital Management collapsed. Now a supervisory board member of the European Central Bank, she is worried about the rise of shadow lenders, which she says reminds her of the US hedge fund’s implosion.

In this interview, she tells my colleagues Martin Arnold and Costas Mourselas why the “remarkable” growth of private funds and other sources of finance outside the regulated banks is the biggest threat to the stability of the Eurozone’s financial system.

“There are certainly caution lights in front of us,” says McCaul. “The most prevalent one is the area into which we likely have the least visibility and where things can move faster than . . . the normal credit dynamics — that is the non-bank financial intermediaries market.”

Non-bank financial intermediaries, often dubbed “shadow banks”, in the EU held assets worth €42.9tn in the third quarter of last year, against €38tn held by traditional lenders, according to the European Commission.

The sector’s growth since the global financial crisis had been “remarkable” and “something that always worries us”, McCaul said.

“It is outside of the banking supervisory and regulatory perimeter,” she added, stressing that opaque links between the sector and banks via repurchase agreements, lines of credit or derivatives raise concerns about what this “translates into for systemic risks”.

Speaking of her stint as superintendent when LTCM collapsed, she said:

“You learn your lessons on the job. I suspect correlation risk is occurring again. Some of these funds, especially certain hedge funds, are becoming so big that they can partially move the market by themselves and are not likely to act as shock absorbers in the same way banks have sometimes.”

Chart of the week

UK pension plans are paying £1.5bn a year more in fees to fund managers than they need to, according to an analysis that increases the pressure on trustees and consultants to get better deals for scheme members.

Analysis conducted by data analytics company ClearGlass and shared with the Financial Times reveals an “extreme” range of charges by asset managers to defined benefit pension plans, write Josephine Cumbo and Emma Dunkley. Some plans are paying up to 14 times more for the same fund product than rivals.

“Some clients are being treated bloody unfairly,” said Chris Sier, chief executive of ClearGlass. “Asset managers appear to price in an extreme range, and offer different clients vastly different prices for the exactly the same thing.

“The result is some clients are effectively subsidising the prices offered to others.”

ClearGlass examined pooled fund strategies investing in listed assets, which account for about 40 per cent of defined benefit pension funds’ allocations. A defined benefit plan promises guaranteed pension payments for life, based on salary and length of service, with the sponsoring employer on the hook for any funding shortfall.

The research looked at the actual prices paid by 688 private and local government pension funds representing £550bn in assets, or about half the market, across 629 managers and 38,000 fund strategies.

The fees paid by pension funds — which are typically brokered by investment consultants — are important as they can affect the eventual payouts to savers in retirement. However, the precise charges paid by thousands of schemes to fund managers are not typically revealed, meaning that plans can unknowingly end up paying much more for a fund product than they need to.

Among the findings of the new analysis, one pension fund was found to be paying six times as much for a fund tracking a fixed-income government bond index as the cheapest market price for the same product.

Elsewhere in pensions land, Brookfield has applied to set up an insurance company in the UK, a move that would allow one of the world’s largest private capital groups to cash in on the wave of British companies offloading their pension plans. Brookfield’s move ups the ante in UK pensions, writes Lex.

Five unmissable stories this week

BlackRock, Norges and GIC are among the investors signed up to back a listed private equity vehicle from the founders of Melrose Industries, in a float last week that came as a welcome boost to the London market.

Jim Leaviss, one of the City of London’s best-known bond investors, is leaving M&G Investments after almost three decades at the asset manager to move into academia. Andrew Chorlton, head of fixed income at Schroders, will replace him. 

Singapore’s state-owned fund Temasek said it would prioritise US investments and be “cautious” about China after warning that its large exposure to the world’s second-biggest economy had hit its performance.

Envestnet, a seller of specialised software and data tools for the wealth management industry, has agreed to be acquired for $4.5nn by a consortium of investors including Bain Capital, BlackRock, Fidelity Investments, Franklin Templeton and State Street Global Advisors. 

Cathie Wood acknowledged her Ark Investment Management’s volatile performance has been “challenged” in 2024 but insisted a return to profitability is in sight. The admission follows six consecutive months of outflows for her flagship exchange-traded fund.

And finally

Sir Henry Raeburn is widely recognised as Scotland’s foremost and finest portrait painter. A new exhibition at Kirkcudbright Galleries in south-west Scotland seeks to challenge the premise that he should be celebrated particularly for his paintings of men, showing characterful paintings of women and children. The exhibition includes approximately 40 works, drawn from both public and private UK collections, including some never before seen in public. Until September 29.