Apple: How much is in your portfolio?

For institutional investors, Apple is an important component of mutual fund portfolios. And from a 401(k) perspective, it is a top holding in many core funds invested by participants (whether they know it or not). According to Morningstar, 5,017 mutual funds have Apple as a holding. And for many funds in the Large Cap Growth or Blend category, Apple is the #1 holding and it compromises a significant portion of the assets. For example, Apple represents 5% of assets in the Vanguard 500 Index (and other funds that mirror the S&P 500).

In October 2012, Apple reached a new high of $705 per share and was yielding a +74% return YTD. After years of relentless innovation and dominating the mobile device industry, new concerns have emerged over the future demand of the iPhone 5 and the iPad. This led to a retracement to below $500 per share. In January, Apple reported selling 18 million more iPhones and iPads (a year-over-year sales increase of 29% and 48%, respectively). However, due to the high rollout and competition costs, Apple reported flat earnings. This sent the share price tumbling another -10% to $440. In just 3 months, Apple’s share price fell -37% — a slash of almost $40 billion in market cap. When a stock as wildly popular and successful as Apple begins to show weakness, the panic sell-off gains momentum quickly and can be fueled by irrational investor behavior.

For the Vanguard 500 Index fund, this recent decline in Apple would contribute a loss of 2% to its portfolio. The broader market returned roughly +5% during this period of time (if Apple was flat, the return for this fund would have been +7%).

For participants investing in mutual funds with Apple, a long-term perspective is important. The higher weightings that negatively impacted recent returns also contributed to higher performance during Apple’s phenomenal run. Also, many fund managers did not start off with high % positions. Instead, Apple’s above-market growth increased their portion of the allocation. Going forward, the spotlight is on Apple. Fund managers will be monitoring closely and will be making necessary adjustments. As an example, Fidelity Contrafund, the largest active shareholder of Apple, was holding close to a 9% stake in Apple. The lead manager, Will Danoff, just recently trimmed his Apple position by 1%.

As a final thought, investors are left wondering if this risky high-flying growth stock will soon dwell in the sleepy land of value stocks. With Apple’s current P/E at 10.8 (the industry average is 15), many analysts feel that it is already in value territory. But lest we forget, this is Apple. Not IBM, HP or Dell (where the value label feels more appropriate). Despite increasing pressures from competition (Samsung now taking 28% of the profits) and the looming future battles in hardware, software and services, there are many potential catalysts that can propel Apple forward. With $130 billion in cash, they can unlock shareholder value through share buybacks or increased dividends (there is a current rumor to increase the 3-yr allocation). To make Apple products more accessible, there is discussion of larger tablets and less expensive phones. They can continue to expand into new markets – for example, an agreement with China would be a major breakthrough. And of course, there is future innovation. Who knows what Steve Jobs had in the pipeline and what Tim Cook is currently preparing to unveil?

If you are interested in receiving advice or perspectives such as this, on an ongoing basis, ABD’s Retirement Services and 401K team would be happy to speak further.

Please contact:

Clay Stafford

Assistant Vice President, Senior Account Executive

Disclosure: This is not a recommendation to buy, sell or hold Apple. Nor, is it a recommendation to buy an iPhone or iPad.

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