£100 million of profit on Nvidia: here’s our latest ideas

Two years on from appearing in our Insider Interview series, Stephen Yiu, fund manager of WS Blue Whale Growth, returns to give an update on the portfolio and opportunities he's seeing.

Yiu tells funds editor Kyle Caldwell why he remains a big fan of Nvidia, but has been forced to take some profits due to fund concentration rules. He also explains why Microsoft's no longer a top 10 holding, where he's been investing in 2024, and runs through key performance drivers.

• Our Services: SIPP Account | Stocks & Shares ISA | What is a Managed ISA?

Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. I'm Kyle Caldwell, and today in the studio I have with me Stephen Yiu, manager of the Blue Whale Growth fund. Stephen, good to see you today.

To start off with, the fund invests in the highest-quality growth businesses that you can find on an attractive valuation. Could you talk us through your latest stance on one of your biggest holdings, which is Nvidia? You've held stock for a number of years before it became a household name. What's the current position?

Stephen Yiu, manager of the Blue Whale Growth fund: We still like NVIDIA Corp (NASDAQ:NVDA). They have done very well for us since we started our journey. Of course, if you followed what happened in 2022, Nvidia's share price has gone down a lot, and the market kept trough at around $300 billion in October 2022, and we took that opportunity to increase our position, to buy more of Nvidia shares at a very attractive valuation.

But what's been very interesting is what's happened over the last 12 months or so when Nvidia's market cap surpassed $1 trillion, and, of course, that surprised a lot of people about how quickly that happened. Then, of course, if you look at the market cap today it is over $3.5 trillion, which is the biggest company in the world as we speak.

I think the way to think about Nvidia is how significant do you think generative AI is going to change the world, our day-to-day in terms of either maybe, you know, you're in a professional white-collar job or maybe you are just like a consumer.

To our mind, we think it is going to be as significant as the smartphones era that we have now, [where we] spend a lot more time with our devices compared to before. So, if you do take that view, then Nvidia would remain at the centre of that ecosystem, being the GPU computer. Of course we would expect competitors coming in, but Nvidia will still remain the core of that, so on that basis we still like Nvidia.

Kyle Caldwell: And have you been taking some profits in Nvidia? I know on occasion the stock has been 9.9% of the portfolio, which is the highest that can go. So, have you then been taking profits due to the fact it's had such a strong run of performance?

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Terry Smith: two reasons why I haven't bought Nvidia 

Stephen Yiu: This is a very good point because obviously we have been asked about this many times. If we didn't have a cap, which is a UCITS [Undertakings for Collective Investment in Transferable Securities] cap at 10%, the performance of the fund would have been a lot better because, over time, the position side would have become bigger as Nvidia's share price [went up].

But, of course, we are a UCITS-constrained fund, so we have been forced to take profits, I would say. If you think about that, we have maintained just short of a 10% position between Nvidia's market cap at $1 trillion last year versus $3.5 trillion today, then we have sold more shares in Nvidia than we currently own.

So, we actually have capitalised over £100 million of profit just by selling shares, so that is something that's very unusual that's never happened before, just because Nvidia is such a big company and such an important company.

But going forwards, of course, we are very valuation conscious, and while you can still believe in Nvidia, which is like anything else that we used to think can do very well. Of course, there's always a time that maybe you want to assess other opportunities that might do even better than Nvidia.

Kyle Caldwell: Now, while Nvidia remains a top 10 holding, a stock that is no longer in the top 10 but has been for a number of years is Microsoft Corp (NASDAQ:MSFT). Why is that now a smaller position for the fund?

Stephen Yiu: Microsoft has been a very interesting company for us because we started investing in Microsoft seven years ago in 2017. Microsoft's market cap at the time was only about $500 billion. Of course, now it is over $3 trillion. And that was a time [when] digital transformation in terms of how Microsoft transitioned to become a cloud subscription business [made the company] very high quality, and we were very early in that journey, hence we have done very well.

If you follow the fund's top 10, Microsoft has been a consistent top 10 holding for the last seven years until August this year, [and] this is very unusual. We'd never have another company that would be comparable to Microsoft being so consistent in our top 10. Microsoft is the only one that managed to have that position.

But we started to get concerned about six months ago in terms of how much money has gone into artificial intelligence (AI). There's a lot of spending, right? If you think about Nvidia's revenue line two years ago in 2022, they were making less than $30 billion. This year they're going to make more than $150 billion top line, right? So someone has decided to spend $120 billion with Nvidia this year compared to two years ago. And who are these people? These people would be - most of them - would be the big tech companies, including Microsoft, Alphabet Inc Class A (NASDAQ:GOOGL) and some others.

We do share some of the negative view about AI, how much of a return on investment can you justify? And I think the quality of Microsoft going forward from here is going to come down versus what they have achieved before. Also, if you look at the capital intensity of the big tech companies today versus like five or 10 years ago, it is a lot higher, which means that they're no longer capital-light businesses.

And of course, that's going to be a valuation number that would reflect that deterioration in quality, isn't it? Because if you are more capital light, it makes your company more high quality versus if you're capital intensive, as we all know, that you should maybe discount that a bit.

So, I think where Microsoft today is trading at an all-time high valuation, based on our numbers, we just do not think that is justified. Of course, we're not suggesting that Microsoft is going to disappear. It will remain a very prominent company in the software ecosystem, but then, from our perspective, we want to maximise the outperformance potential. And we are not convinced that Microsoft is going to do that from an investor's perspective.

Kyle Caldwell: Let's now move on to the rest of the fund. How many holdings do you currently have and could you give a flavour of the types of sectors and themes you're seeking to profit from?

Stephen Yiu: So, it's just over 25 stocks currently, and what we have got in the rest of the fund is other themes in terms of exposure to luxury, to biologics, sports gaming in the US, and also consumer staples like Philip Morris International Inc (NYSE:PM), for example.

So, the way that we think about this is, [and] I think it's important to expand on this point, if I reflect on the last seven-year journey that we have [had], on average [we've had] about 40% exposure to technology companies.

But, of course, that composition of the mix is very different today versus seven years ago. The companies that we have invested in within the technology bucket are very different, and we can come back to that.

I think what's really important on the back of this point is that we're not fixated to start with. I mean, we don't have a mandate to say, OK, we need to have this exposure. But what's really important from an investor's perspective is you need to think about which companies or sectors are going to make a difference in the real world. And, of course, over the last seven years or so, technology was the place to be and you need to take a reasonable exposure to that part of the market.

• Run your winners or take profits? How the pros decide
• 2025 – is the future DIGITAL?

Kyle Caldwell: And could you talk us through recent portfolio activity? What have been the new purchases for the fund in 2024?

Stephen Yiu: We have done a few things in terms of resizing and our positions and introducing new ideas or exiting certain positions this year. On a very high level, we remain very positive on AI infrastructure versus AI applications. So, AI infrastructure would encompass Nvidia, Broadcom Inc (NASDAQ:AVGO) or Vertiv Holdings Co Class A (NYSE:VRT), which was a new company that provides liquid cooling systems for data centres.

If you follow AI development, AI is going to be a lot more energy intensive, so you do need to have some advanced cooling systems in the data centres. Vertiv is a market leader in doing that, so we continue to like AI infrastructure.

On the other hand, we have become more cautious as we talk about Microsoft, or some other company, on AI application, so we have been reducing positions in that bucket. We still like Meta Platforms Inc Class A (NASDAQ:META) because we think Meta would have the highest chance of delivering a high return on investment just because a lot of the investments are going to improve the efficiency of how they deliver advertisements to us rather than creating something new that you want to convince people [about], like, why should we be paying for the Microsoft co-pilots, or maybe Google Gemini in time, which is something very new to the ecosystem.

We also like sports gaming. We have increased our exposure to US sports gaming through Flutter Entertainment (LSE:FLTR) and DraftKings Inc Ordinary Shares - Class A (NASDAQ:DKNG), and they have done very well in the US. They only started legalising sports gaming a few years ago, so it's a very new market to them [while] we are already very familiar with that in Europe or in Australia and some other places.

And then we also like Philip Morris, which is something quite interesting that we have done very well on. They have got approval to market their IQOS product back to the US, [and] they have not been in the US since the spin-off from Altria in 2008. At the same time, they acquired Swedish Match a few years ago, which offer nicotine pouches, basically a non-traditional cigarette product.

So, if you look at a composition of Philip Morris now, over 50% of the business would be in non-traditional cigarettes. So, we would actually see this company as transitioning to become maybe more ESG (environmental, social and governance). I mean, we're not running an ESG mandate, but they are doing a lot of things that are very positive within the market they operate in.

Everyone likes to talk about Microsoft, it's easy to understand, it's a good company. But Philip Morris itself has gone up over 35% year-to-date, while Microsoft has only gone up about 10%. So, while you're saying, OK, Philip Morris sounds a bit boring because it's not an AI play, there's not really a theme, but, actually, if you do the bottom-up research on this particular company, which is what we do, then you discover there's a lot of things that are helping the company to do very well from here.

At the same time, we would consider this as very idiosyncratic in a way that's not correlated to what's happening in the world. Of course, we can talk about the world being very uncertain, the dynamics, etc. So that's what we have done.

• Where to invest when trouble’s brewing
• Is it time to come out of cash? And what to buy now

Kyle Caldwell: The last time I interviewed you on camera was towards the end of 2022, which was a tough year of performance for the fund due to the fact that interest rates rose very quickly in that year. Performance has bounced back since then. Obviously Nvidia's performed well, but could you talk us through other key performance drivers?

Stephen Yiu: So, if we go back in time to 2022, a few things happened then. One was that interest rates had gone up very quickly. Of course, that has implications for the valuations of many companies, whether you're high quality or not as high quality.

For our companies, such as Microsoft, the share price was actually down more than 25% at the time. But to us, it's not interest rates going up to 5% in the US that's going to fundamentally change how Microsoft's business is going to do in the next couple of years. So, I think [there was] a bit of a reset in valuation when we got into 2023, so a bit of a natural recovery from there in terms of valuation reset.

At the same time, we exited some major positions in 2022 to shift into probably more AI-related [firms]. Of course, that would have helped. I think what's really important for 2022 is that we equally recognise that we had entered a new regime, meaning that there's going to be increased geopolitical uncertainties, inflation is going to be very sticky, interest rates are going to remain higher for longer, which we are still seeing today. So, what it means is there's going to be a lot of implications about things that would have worked, maybe, let's say 10 years running on [from the] pandemic versus the 10 years going forwards from 2022.

At the time, we initiated our first and only energy company called Canadian Natural Resources Ltd (TSE:CNQ), which was very controversial because people didn't really understand why we did that. But to us, the company is very high quality to start with. We thought that under this new regime, Canadian Natural Resources would be able to deliver the shareholder return that we expected the company to do. So, we took a position in that company, it was in our top 10 for a period of time, and it did very well for us.

Over time, I think what's really important over the last couple of years is that there's been a bit of gradual transition in terms of positioning, as we see more news come in over time, or a different macro backdrop. I think that is the role of an active manager, which is something that's very important to us. Obviously, if you asked me to go back in time seven years, could I have designed a portfolio of 25 companies that would have done well over the next seven years, which is the last seven?

Of course, we would never have expected a pandemic to happen. We would never have even envisaged that inflation could be like 10%, 15%, and interest rates going up so quickly. And then you have a few wars, elections, etc. It's impossible. But active managers can navigate the market on behalf of investors, seizing the best opportunity and re-scaling certain positions over time. So, that is something of an ongoing development in how we manage the fund.

Kyle Caldwell: Stephen, thank you for your time today. That's it for our latest Insider Interview. Hope you enjoyed it. You can let us know what you think, you can comment. If you liked the video, hit that 'like' button, and you can also hit the subscribe button for more future fund manager videos. Hopefully, I'll see you again next time.