Terry Smith: Nvidia is too unpredictable

Terry Smith has defended his decision not to hold Nvidia (US:NVDA), arguing that the artificial intelligence (AI) posterchild still lacks adequate "predictability".

In an episode of the IC Interviews podcast (listen to the full interview below), Smith said his team had discussed whether they should buy the shares but added: "One of the things that we're seeking when we invest is a high degree of predictability – things that produce fantastic results and are up a couple of hundred per cent for the last year are tremendous, but are they predictable?

"Before [Nvidia boss] Jensen Huang got up in May last year and said what he said about the demand for their chips and AI I don't think too many people thought this was going to happen."

He added that the company had already made two major pivots in changing the type of chip it focused on, adding: "Any business that has to make such fundamental changes is worrying because sooner or later you get those things wrong. We're unlikely in my view to fail because we don't own the greatest stock out there, but we are quite likely to fail if we start owning some of the worst stocks out there."

The stellar performance of Nvidia and other 'Magnificent Seven' members partly explains why, most recently, Smith's roughly £23bn Fundsmith Equity has performed well but trailed the returns of the tech-heavy MSCI World index. Smith has previously defended the fund's underperformance of that index in recent calendar years.

The wide-ranging interview also saw Smith expand on the fund's shrinking allocation to UK stocks, as well as a wait-and-see approach to a bank stock that could potentially enter the fund in future.

He also argued that Novo Nordisk, the European market darling associated with its vast success in the weight-loss drug space, could continue to innovate on other fronts.

"We purchased Novo because we thought it had a very unusual, possibly unique attitude to drug discovery," he said. "It's controlled by a foundation that represents the founding members of the company and has a real long-term view and had a real radical approach."