(March 7): Concerns that Nvidia Corp’s stratospheric gains might be unsustainable have spread to environmental, social and governance (ESG) investment managers who beat the market last year by betting big on the stock.

“I’m optimistic in the long run, but recognise that the valuation isn’t exactly attractive,” said Kristofer Barrett, who oversaw a decision to make Nvidia the biggest holding in Swedbank Robur Technology last year, transforming it into the top performer in a Bloomberg ranking of ESG funds. The Swedbank fund, which is registered as “promoting” environmental, social and governance metrics under European Union rules, returned 53% in 2023.

But there’s now some concern that Nvidia may end up a victim of its own success, according to Barrett.

There’s a “realisation that this has become a retail stock,” he said. “And that portends a bubble, potentially.”

Overall, the proportion of ESG funds holding Nvidia shares dropped to 15% of the total at the end of December from a high of 20% in the second quarter of 2023, according to fresh data provided by Morningstar Direct.

The figures, which cover equity-oriented open-end and exchange-traded funds that satisfy Morningstar’s ESG criteria, show that the value of those funds’ exposure to Nvidia was roughly US$17.6 billion (RM82.69 billion) at the end of last year, down about 10% from the middle of 2023. In the same period, Nvidia’s market value rose 17%.

Nvidia enthusiasts point to its iron grip on the chips needed to develop artificial intelligence (AI), after chief executive officer Jensen Huang managed to turn a niche maker of graphics cards for gamers into a US$2 trillion technology colossus. And so far, warnings of a sudden downturn in Nvidia shares have generally been followed by eye-popping gains.

Last year, Nvidia’s market value soared almost 240%, and is already up almost 80% in 2024. Of the 66 analysts tracking Nvidia, none is advising clients to sell, while 60 say investors should continue to buy the shares, according to data compiled by Bloomberg.

ESG funds betting big on Nvidia are delivering better returns than their peers. Among these is the Robecosam Net Zero 2050 Climate Equities fund, which is registered under the EU’s strictest ESG disclosure rules. Chris Berkouwer, who manages the Robeco fund, says Nvidia is treated as a “transition facilitator” in his portfolio, based on a view that its technology will help companies across industries cut their environmental footprints.

The US$150 million fund, which counts Nvidia among its biggest holdings, is up about 7% in the past month, outperforming more than 90% of its peers, Bloomberg data show.

“We’re still quite optimistic on Nvidia,” said Berkouwer. Nvidia’s latest quarterly results, which the company used to deliver a sales forecast that once again surpassed analyst estimates, has “kept the AI dream alive,” he said.

“Despite the price going up significantly, the earnings have risen even more,” said Berkouwer, who notes that Nvidia is part of a “balanced mix” in his portfolio. “That is really impressive and a testament to Nvidia being able to successfully meet that demand.”

But as Nvidia morphs into one of the world’s absolute biggest companies, there’s also a growing number of sceptics. Cathie Wood, despite being an outspoken proponent of the transformational potential of AI stocks early on in the cycle, actively trimmed her exposure to Nvidia last year and other big-name stocks tied to the AI boom.

And hedge funds that piled into tech stocks before Nvidia’s latest set of results are now exiting at the fastest pace in seven months, according to data from Goldman Sachs Group Inc’s prime-brokerage unit.

A spokesperson for Nvidia declined to comment.

Barrett, who’s leaving Swedbank for a role at another firm he can’t name until an official announcement has been made, was replaced as portfolio manager of the Swedbank Robur Technology fund in February.

Christian Blink, who now runs the Swedbank fund, said Nvidia “might be a little bit stretched” in the short term, with the possibility of some investors seizing the moment to cash in.

Further out, the outlook is positive. “We believe that people tend to underestimate the long-term implications from generative AI and Nvidia is an enabler for that technology,” Blink said.

And Nvidia remains the fund’s biggest holding, now accounting for almost 10% of the roughly US$15 billion Swedbank portfolio, he said.

A bubble is “always a worry”, Blink said. “I don’t think there is one, but many factors are there for generative AI to become one. We are monitoring that.”