If stock drops, some investors could take hit
By David K. Randall, Reuters April 1, 2012 2:06
Article from Calgary Herald
When it comes to Apple, investors could become victims of their own success.
It is a dilemma more mutual fund managers are wrestling with after the company's nearly 48 per cent gain this year. Those who bought Apple well below its current price have seen the value of their investment balloon, sometimes to more than 10 per cent of their fund's assets.
That effectively turns a brilliant decision into a concentrated stake, undercutting the benefits of diversification and making some mutual funds riskier.
As Apple stock has marched higher, well-timed bets on the company have helped some growth-oriented and blended mutual funds outperform the broad market. But in doing so, many of those funds have now tied investor dollars closer to the performance of a single company.
This isn't much of an issue when it comes to funds that market themselves as narrow bets on technology. But many funds whose broad holdings could be the core of a retirement plan are stocking up on Apple.
A dramatic fall in Apple's shares, however unlikely that may seem at the moment, would quickly ripple across the retirement accounts of millions of investors who thought they were safer investing in funds than individual shares.
"It adds to the risk profile of a fund to have a significant stake in one stock because it makes them more susceptible to bad news on one or two stocks and they won't be able to cushion the blow with diversification," said Todd Rosenbluth, a senior fund analyst at Standard & Poor's Capital IQ.
Generally in the mutual fund industry, any position over five per cent of assets is considered a large bet that may influence a fund, said Dan Culloton, a fund analyst at Morningstar.
Shares of Apple have nearly doubled from the $310 they hit in June, and at about $600 a share are up nearly 48 per cent in 2012 alone. Apple, the world's most valuable company by market capitalization, now has a weighting of 4.2 per cent in the broad S&P 500 portfolio, the benchmark against which the performance of most U.S. mutual funds are judged. That means 4.2 cents of every $1 invested in an S&P 500 index fund will be allocated to Apple shares, before fees.
By definition, actively managed mutual funds have overweight positions in companies they think will outperform the broad market, but usually not more than five or six per cent.
But 46 funds tracked by Morningstar have stakes in Apple that exceed nine per cent of assets, or roughly double the company's weighting in the S&P 500 index. This does not include sector funds that focus on technology or other specialized investment.
Some reluctance on the part of portfolio managers to sell Apple shares is understandable. Trimming exposure could lead to underperformance for a fund.
Some fund managers are taking steps to lower the weighting of Apple in their portfolios. "We got to the point where it was an inordinate part of our portfolio, and in order to control risk it was only prudent to trim it back," said Robert S. Bacarella, a Wheaton, Ill., fund manager.
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