Apple Turns Sour for Large-Cap Funds

FUND SPY: Which widely held, actively managed equity funds have been hurt by the world’s largest company?

Holly Cook 18 January, 2013 | 6:00AM Dan Culloton

As the world’s largest company by market cap and one that has increased in value by more than 14,000% since its stock split in February 2005, Apple (AAPL) is a popular blue-chip for fund managers around the globe. Since the worm turned for Apple in September of last year, however, we've seen just how much some funds had relied on the technology giant for their results. 

Apple has been both David and Goliath in the past year. No matter which way it goes in the future, its presence or absence will continue to influence large-cap portfolios

Apple was a juggernaut for most of 2012, rising 33%, making it by far the biggest contributor to the returns of funds that had made substantial commitments to the stock. 

Then September happened. Chalk it up to concerns about increasing competition in the tablet and mobile phone markets, efforts by US investors to realise substantial capital gains before taxes increased in 2013, or just reversion to the mean for a stock that had delivered above-average results for a long time. Nonetheless, Apple took a tumble. From September 19, 2012, through to the end of the year, the stock shed nearly a quarter of its value, taking down many portfolios that had above-average holdings in the maker of the iPhone, iPad, iMac and iWhatever-is-next.

In the long term, this time period may amount to no more than a blip on Apple's and these funds' records. However, curiosity about how some of the industry's largest funds with big helpings of Apple have handled the stock's recent slide invited a closer look.

Apple Bites the Funds that Feed It?

Most non-technology-sector funds with substantial commitments to Apple have taken it on the chin since September. Below is a list of the UK-domiciled non-sector funds with the largest allocations to Apple as of their most recent portfolios. All of them had stakes in excess of 7.8%, and most have done worse than their benchmarks and peers since Apple's September peak through to end-2012.

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AXA Framlington American Growth (rated Bronze by Morningstar OBSR analysts) is by far the largest fund on the list with over £60 million in AUM. It is also the fund with the largest holding in Apple shares on our list: more than 9.2% of portfolio assets is dedicated to the tech giant.

Interestingly, Morningstar data* from end-September reveals that fund managers Stephen Kelly and Dan Harlow had recently picked up an additional 22,000 Apple shares to total 143,000 in the portfolio. This swollen Apple holding will have lost 14% of its market value since the end of September, contributing to the fund’s 6.3% decline in the final quarter of 2012. Those last three months saw the fund’s total return fall from around 13% year-to-date to just under 6% by year-end. The fund underperformed its US Large-Cap Growth Equity category average by 2.5% as Apple’s tumble ate into returns.

Baillie Gifford American (rated Bronze) is the second-largest fund on our list, with just under £20 million in AUM. The fund had 7.8% of its portfolio in Apple shares at end-September and, as with the AXA Framlington fund, performance in the final quarter of 2012 slipped into the red. Baillie Gifford American ended 2012 up 4.4% on a total return basis but this would have been closer to 8% had it not been for a dip on the home straight. Again, Apple’s demise would have been partly responsible for Baillie Gifford American underperforming category peers by 4.08% last year.

In contrast to the AXA Framlington fund, however, data from end-September shows Baillie Gifford American manager Mick Brewis had just sold 3,070 shares in Apple, bringing his total holding down to 47,120 shares. Brewis doesn’t comment on individual holdings but this move shows good timing at the least.

The third fund to highlight from the top five Apple-holders is Edinburgh Worldwide (rated Bronze). This investment trust, also managed by Baillie Gifford, had 8.48% of the portfolio in Apple shares at end-September and as with our other two examples it generated strong returns in the first quarter, negative returns in Q2 and a return to positive performance in Q3. But, unlike our first two examples, Edinburgh Worldwide once again recorded a solid return in Q4, with the fund’s share price rising 7.5% to secure a total return over 2012 of 23.5% in price terms. Even in net asset value terms, the trust returned 17% over the year.

Edinburgh Worldwide substantially outperformed its peers over the year, in part due to its global focus compared to the US equity mandate of the other funds highlighted. Edinburgh Worldwide’s Morningstar category of Global Large-Cap Equity Growth achieved an average total return of 12.3% on price terms as European equities rallied. Even so, the trust has close to half its assets in North American investments and until recently Apple was the single largest holding in the portfolio.

It’s not only the global mandate that helped Edinburgh Worldwide secure such a strong performance in spite of Q4 weakness from one of its core assets. Leading contributors to 2012 performance came from the consumer cyclical and technology sectors, with (AMZN) and eBay (EBAY) among those driving the price, in addition to Apple in the first nine months of the year.

As with all the funds mentioned, Apple may have suffered in the final stretch of 2012 but over the year as a whole it still registered a share price return in excess of 30%.

Apple has been both David and Goliath in the past year. It has seemed like an unstoppable growth and innovation machine that money managers ignored only at their peril. It also has been derided as a much-too-loved "story stock" destined to see its margins eroded by competition and its share price pared by a reversion to the mean. No matter which way Apple goes in the future, its presence or absence will continue to influence large-cap portfolios, particularly those focused on North America.

As with all top holdings that constitute a substantial portion of a portfolio, fund investors need to both understand and be comfortable with their managers' decisions regarding the stock. More broadly, investors should recognise that funds that thrive by a big commitment to a company like Apple also can struggle because of it.

*All data from Morningstar Direct, as at end-September.

Read Morningstar’s Brian Colello on the reasons behind Apple’s weakness and his long-term view.

Holly Cook and Dan Culloton co-authored this article.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating Inc1,574.37 USD-0.47
Apple Inc186.31 USD-0.36
AXA Framlington American Growth Acc631.20 GBP0.27
Baillie Gifford American A627.20 GBP0.19
BNY Mellon American GBP2.60 GBP0.27
eBay Inc38.32 USD-0.21
Edinburgh Worldwide Ord845.00 GBX0.36
PSigma American R  -
About Author Holly Cook

Holly Cook  is Managing Editor of