(Bloomberg Opinion) -- For the third time in four years, the stock picker beating everyone is Fidelity Investments Inc.’s decoder of computer chips, crushing every measure of performance as the more popular passively managed index funds tracking market benchmarks proved little more than also-rans in 2024.
He is Adam Benjamin, the 53-year-old who took charge of Boston-based Fidelity’s Select Semiconductors Portfolio mutual fund in 2020 after two decades focusing on the industry that invigorates smartphones, virtual reality headsets, autonomous driving, cloud computing transition, electric vehicles and U.S. national security.
Benjamin is No. 1 for the second consecutive year among 431 US-based mutual or exchange-traded funds investing at least $5 billion over the prior five years, producing a 49% total return in 2024. He led his closest competitor by 4 percentage points and vanquished the S&P 500 Information Technology Index (up 37%), the S&P 500 Index (25%) and the Philadelphia Stock Exchange Semiconductor Index (20%), according to data compiled by Bloomberg. His 80% total return in 2023 humbled No. 2 by 5.3 percentage points when the S&P 500 Information Technology Index gained 58%. Benjamin dominated 2021 with a 59.2% total return when the runner-up ETF returned 56.2%. His only setback came in 2022 when the fund declined 35.2%, an outcome that still outperformed most peers.
While financial “experts” routinely assert that low-fee, passive funds tracking various indexes are superior to commission-charging, actively managed funds for long-term investors, data compiled by Bloomberg the past year show otherwise: Nine of the top 10 funds and 16 of the top 20 in 2024 were actively managed even after accounting for fees and other expenses. Six of the 10 leading funds and 11 of the top 20 are in the Fidelity family, which emphasizes selections that can’t be replicated by benchmark funds whose composition changes infrequently.
To be sure, sponsors of index funds insist their risk is a smidgen of what active funds take on because benchmarks have fewer price and weighting changes that drive up volatility. Index funds also initiate myriad quantitative outcomes without replicating the qualitative decisions of active management.
Benjamin asserts that passive and active funds compete in the same categories of investor preferences with the same mathematical calculations. “We’re just choosing between those relative opportunity sets and we’re delivering better performance,” he said during a Zoom interview earlier this month. “That doesn't mean we're taking on more risk to do that.”
Tim Cohen, co-head of Fidelity Investments’ equity division, said in a separate Zoom interview that “the difference between active and passive is actually very small” when determining the “absolute risk of being in an equity asset class. Those benchmarks are invested in securities which have beta streams, which are, you know, pretty volatile.”
Sure enough, the dichotomy between passive and active funds became apparent when 2023’s second-best performer, the Vaneck Semiconductor ETF, dropped to No. 7 last year because it suffered a loss of 10 percentage points in total return compared with the Fidelity Select Semiconductor Portfolio. The divergence derives from Benjamin’s decision to overweight Nvidia Corp. relative to benchmarks, which contributed eight points to performance, according to data compiled by Bloomberg. Similar thinking around Astera Labs Inc. added three points, and an extra five points came from Marvell Technology Inc. and Impinj Inc. Just as important, avoiding Intel Corp. contributed five points.
“The best advice I was ever given was, look at your funds that you manage every day as if you were buying that fund and those positions in the same way on that given day,” said Benjamin, who joined Fidelity in 2011 before managing its funds in 2014, and noted that he gets up at 4 a.m. every morning.
Unlike any of the indexes or ETFs that follow semiconductors, Benjamin’s familiarity with silicon and germanium, whose units are measured in a billionth of a meter, or nanometer, and mass-produced as 14- and 10-nanometer bits used in diodes, transistors, rectifiers and integrated circuits, underlines his idiosyncratic approach. He more than doubled the fund’s holding of Broadcom Inc. in September to 11.8 million shares from 5.3 million when the average share value for the month was $162. Broadcom, which sells storage adopters, controllers, networking processors, motion control encoders and optical sensors, appreciated 43% in December to an average price of $205 and contributed five percentage points of total return to the fund in 2024, second only to Nvidia, according to data compiled by Bloomberg.
Research by Fidelity showed “Broadcom had been a relative underperformer for quite a period leading up to that point” when Benjamin said he increased its weighting in the fund. “It was a combination of the relative risk-reward of that grouping of the (Artificial Intelligence) basket within the benchmark.”
Astera was snapped up by Benjamin when the developer of platforms for cloud and AI infrastructure became a public company in March. He doubled the fund’s holdings to 5 million shares in May from 2.6 million at the time of the initial public offering at an average price of $73, about half its value of $132 on Dec. 31. Astera isn’t included in the Philadelphia Stock Exchange Semiconductor Index, and only 35 of the 1,407 major publicly traded technology funds in the US own the company’s shares. Benjamin allocated 3% of his portfolio to Astera when the stock provided three percentage points of total return as the fifth best performer in the fund, according to data compiled by Bloomberg.
“We owned [Astera Labs] when it was private for quite a few years,” said Cohen. “Adam knew the company and the founders very, very well.” Benjamin said his familiarity with private companies before they go public enabled him “to increase our bet size” in Astera “given the fact that we had confidence in the fundamental story and that ultimately ended up shining through as the company progressed through the year into the summer period, reporting some results in the July timeframe.”
Nvidia remains Benjamin’s favorite, accounting for about 25% of the fund while appreciating 171% the past year and contributing 34 percentage points, or two-thirds, of its total return. Capped by a 25% maximum holding rule, Benjamin was required to sell Nvidia whenever its value breeched the holding ceiling, which occurred repeatedly since December 2023, when it traded at a 44% discount to peers. After gaining 171% last year, Nvidia still traded at a 17% discount at the end of December, although its relative strength to the fund declined the most since 2018, according to data compiled by Bloomberg.
“I’ve been doing technology and semiconductors almost 25 years and there’s no theme that I’ve seen like this AI trend,” said Benjamin. “AI is going to be with us for a long time. It’s not a fad. It’s not something that we’re going to wake up in a year or two years and be like, ‘Oh, that was a big joke.’ I'm pretty confident however long I’m going to be doing sector investing, which is the rest of my career.”
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To contact the author of this story:
Matthew A. Winkler at [email protected]
