Yesterday’s Wall Street Journal has an article in which it looks at the investment vehicles that hold AAPL shares. A third of equity mutual funds sold in the US hold AAPL; 20% of hedge funds claim it as one of their top ten long positions (given the sketchy nature of hedge fund disclosure, I wouldn’t bet the farm that this is figure is entirely accurate, though).
what Apple is
Just to be clear,
–Apple is a US-based company.
–It’s incorporated in California, where its headquarters is located.
–Primary trading is on NASDAQ.
–AAPL doesn’t pay a dividend.
–AAPL isn’t just a large-cap stock. It’s a MEGA-cap stock.
The median market cap for members of the S&P 500, the large-cap index, is a touch under $12 billion. AAPL, in contrast, has a market cap of close to $550 billion, or 45x the median. The company has no debt and over $100 billion in cash on its balance sheet.
what funds hold AAPL shares
Despite this description, according to the WSJ the following kinds of funds hold AAPL shares:
–40 funds that focus on dividends in selecting stocks
–50 funds that specialize in small- or mid-cap stocks
–3 Fidelity funds that specialize in Europe
—international funds, including the Ivy International Growth and the Waddell & Reed Advisors International Growth
–the BlackRock High Yield Bond Fund, a $5.9 billion junk bond fund that held $8.3 million in AAPL shares at 12/31/11.
how can these funds do this?
In one sense, it’s crazy. How can you trust a manager who says he’s going to buy small, fast-growing stocks with market caps below the S&P 500 median for you, after you see his outperformance is coming from a half-trillion dollar stock? In this regard, the BlackRock High Yield position that the Journal reports is extremely hard for me to understand. Ignore the fact that it’s a bond fund owning stocks. The AAPL position size is so small, at 0.14% of assets, that it’s immaterial to fund performance. There has to be more to that story. One guess is that the position is much larger today.
In another, narrowly technical, sense–even though the fund name, and presumably its marketing materials, don’t give the slightest hint that this may be going on–fund rules doubtless permit the purchases.
If you read the prospectus carefully, it will surely say something like the fund will achieve its objective (of buying small-cap, or foreign stocks…) by having at least, say, 65% of the fund assets invested in the specified kind of securities. It will go on to state that the fund reserves the right to invest the rest of the fund in other stuff. (By the way, the prospectus may also say that for temporary defensive purposes, the fund has the right to redeploy its assets entirely to cash or to Treasury bonds, or some other presumably safer form.)
why do they do this?
I think the obvious answer is the correct one. The portfolios in question want to achieve a performance advantage, either over the other funds in the same category or against their benchmark index, by buying securities that are outside their normal investment universe.
Is this illegal? No, because of the prospectus disclosure.
Is it unethical? In my view, yes. An international manager might try to argue that because APPL manufactures and sell products abroad, it’s actually a foreign stock. Someone might buy that explanation. It certainly wouldn’t fly in the institutional pension management world, however. And small-cap managers, who typically charge higher fees to compensate for the extra work involved in small-cap, don’t have an ethical leg to stand on.
what to do
Figure out how much AAPL you actually own and ask yourself if you’re comfortable.
Remember that any S&P 500 index vehicle you hold is about 4.5% AAPL. AAPL may also be 20+% of any tech fund you own. And, as the WSJ article suggests to me, it might be wise to take a quick look at all your mutual funds or ETFs to see how much AAPL is in them. You can get the information from the management company website, the SEC Edgar site, or to the latest report you’ve gotten from the fund itself.