This A.I.-focused tech fund is up more than 20% this year, beating 90% of its peers

Published Sun, Apr 9 20238:28 AM EDTUpdated Sun, Apr 9 20238:47 AM EDT

One tech fund is capitalizing on the artificial intelligence boom — and beating 90% of its peers this year. A.I. "is probably the largest technology theme, driver and disrupter in the next 10 plus years," said Adam Benjamin, fund manager of the $9.5-billion Fidelity Select Technology Fund (FSPTX). The mutual fund is up 22% in 2023, outperforming the Nasdaq Composite , which has risen 15%. It also has a solid long-term track record, racking up a 15.7% annualized return over the past 15 years that puts it in the 10th percentile, according to Morningstar. Companies that rushed to embrace digital transformation during the pandemic continue to seek ways to improve efficiency through large language models like ChatGPT enabled by A.I., Benjamin said. And the biggest facilitator in the industry is no doubt Nvidia , he said. "Nvidia is that enabler to make that happen," Benjamin said. Nvidia is "the single largest beneficiary by a wide stretch in terms of A.I.," he added. The chip stock is the Fidelity fund's third largest holding with a more than 8% weighting. Nvidia shares have soared 84% this year, boosted by their biggest quarterly gain since 2001. Investors grew bullish on Nvidia's A.I. vision, while also viewing the inventor of the graphics processing unit as one of the chip manufacturers best positioned to endure an economic slowdown that's already hurting personal computer and wider semiconductor sales. Benjamin, a 13-year Fidelity veteran after stints at Jefferies and Cowen, said Nvidia has had ample investments in modeling and full stack developers for a long time, putting it in a position to solve A.I.'s problems and help companies fully embrace the technology. "In terms of who is really driving the adoption and will be the enabler behind this technology, Nvidia is really far up," Benjamin said. "It really drops off after that." Benjamin, a Cornell University government major, has a strong background studying the industry, previously heading Jefferies' semiconductor equity research. Other semiconductor names among Fidelity Select Tech's top holdings include Marvell Technology , NXP Semiconductors , ON Semiconductor and GlobalFoundries . Threat of rising rates To be sure, rising interest rates have been top-of-mind for tech investors the past year. Higher borrowing costs crushed technology names last year as valuations were smashed by rising rates, which lower the present value of future earnings and raise the cost of borrowing. Benjamin said software is the area in tech that's most sensitive to interest rates. The manager started 2023 with lower-than-average exposure to software. "That's had the biggest impact" on software providers, he said of the Federal Reserve's tighter monetary policy. Going into the period of higher rates, software "had gotten probably several orders of magnitude out of whack relative to historical valuations," Benjamin said. Now, after the pullback in stock prices and valuations, opportunities in the sector are starting to emerge, said Benjamin. Among software names, his fund owns Salesforce , Splunk and ServiceNow . "We're sort of getting to a point where these companies' estimates have come significantly down," Benjamin said. "I think it's creating some interesting opportunities that I've taken advantage of in the portfolio." The fund is rated four stars by Morningstar, has an expense ratio of 67 basis points (0.67%) and a turnover ratio of 87% — meaning the manager has bought and sold a number of shares equal to 87% of the total value of the portfolio in the past year, an important tax consideration.