America’s top stock picker Benjamin sees beauty in chips

SINCE the beginning of the century, when he started following the industry that makes silicon and germanium, whose units are measured in a billionth of a meter, or a nanometer, Adam Benjamin has helped investors profit from the smartest part of the world.

“The beautiful thing about semiconductors,” the mass-produced 14-and 10-nanometer chips used in diodes, transistors, rectifiers and integrated circuits, “is they are the brains for smartphones, virtual reality headsets, autonomous driving, cloud computing transition, electric vehicles and a US national security priority,” he said in a January 2022 interview.

Back then, the 52-year-old who took charge of Boston-based Fidelity Investments Inc’s Select Semiconductors Portfolio mutual fund in 2020 after two decades focusing on computer chips, was basking in the attention that comes with shepherding the best-performing stock mutual or exchange-traded fund, soaring 59.2% in 2021. Although 2022 was a down year for the fund, as it fell 35.2% (still better than most of its peers), Benjamin has it back on top.

His fund is again No. 1 among 391 US-based based mutual or exchange-traded funds investing at least US$5bil over five years, producing an 80% total return in 2023 that beat No. 2 by 5.3 percentage points. He also crushed the S&P 500 Information Technology Index (up 58%), the S&P 500 Index (26%) and the Philadelphia Stock Exchange Semiconductor Index (68%), according to data compiled by Bloomberg.

While Fidelity’s Select Semiconductors and the runner-up VanEck Semiconductor ETF – a passively-managed fund – had more than 90% of their assets in semiconductors, Benjamin led the pack by investing a bigger percentage in the United States (82%) where returns were greater compared with the ETF (79%). Additional returns were achieved by overweighting Nvidia Corp and underweighting Texas Instruments Inc and Analog Devices Inc.

Idiosyncratic shifts in holdings (in contrast to passively managed funds that just track market benchmarks) included: Advanced Micro Devices Inc (from 3.5 million shares to 1.4 million and then up to 4.1 million before dropping to 3.3 million) and Micron Technology Inc (from 2.3 million to zero to 5.1 million).

Cash on hand rose from US$137mil last year to US$253mil, or as much as 3.7% of the fund, before declining to US$65mil. If there is a theme to Benjamin’s strategy after the Covid-19 pandemic supply disruptions, it is a conviction that chips retain their value.

“There’s been this perception of semiconductors as cyclical and pricing never goes up,” he said during an interview at Fidelity headquarters earlier this month.

“We’ve seen the opposite. There’s been this realisation of the importance of the industry,” especially within cars. You have a US$50,000 car that may have traditionally had US$300 to US$500 of semiconductors, depending on the high and low end. The range is now like US$1,000 to US$2,000.”

Nvidia is Benjamin’s favourite holding, amounting to 25% of the fund’s assets.

The company’s shares returned 238% in 2023, beating every member of the S&P 500.

It’s the only company whose shares more than tripled, with analysts still anticipating an additional 30% gain during the next 12 months when none of the other best performers in the benchmark index approach Nvidia’s appreciation or prospects.

If Benjamin wasn’t constrained by the fund’s protocols in terms of holdings and concentration, Fidelity Select Semiconductor easily could have produced a greater return in 2023. “I can’t own more than 25% of an individual name from a total net assets basis and Nvidia has gone up a lot and gotten so big because of the outperformance,” Benjamin said. “Let’s just say, I own more than 24% as of Sept 30.”

Benjamin has plenty of reasons to remain bullish on Nvidia, which trades at the biggest discount in at least three years in terms of its forecasted price to earnings ratio relative to the Philadelphia Semiconductor Index.

Nvidia also trades at the biggest discount to Advanced Micro Devices in at least three years, according to data compiled by Bloomberg.

Nvidia has been investing in artificial intelligence (AI) “for more than 10 years, and its full-stack solutions of chips, software and system have positioned it extremely well as the provider of choice for hyperscalers and enterprise looking to embrace generative AI,” Benjamin told his fund holders in August.That advantage, he said in the interview this month, is reflected in Nvidia’s data centre graphic processing unit for AI. “It does have a chip in there, but if you look at one of their H100s that is the thing that’s been driving their growth.

That’s effectively a server with eight graphics processing unit’s (GPU), eight of their GPUs in 35,000 other parts and that’s a US$300,000 box where the chip itself is US$25,000.”

For all of his confidence picking individual stocks, Benjamin is less assured about the broader market. “In the 20-plus years I’ve followed the semi industry, this has been the most interesting and different cycle that anyone’s seen,” he said.

“In 2020, things stopped for a very short time and all of a sudden they just recovered dramatically and no one was expecting that. So, history is always a guide for everyone that is in the stock market, including myself,” Benjamin added. As for what’s to come, Benjamin expects more of the same. — Bloomberg

Matthew Winkler is editor in chief emeritus of Bloomberg News and writes about markets. The views expressed here are the writer’s own.