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 "I think they are doing everything right and it's still a cheap
stock based on earnings and revenue," he says.
Yet that devotion for Apple is a problem for Burnham and some other
managers of so-called diversified funds like his - they want more
Apple than they can buy under self-imposed risk-reducing guidelines
that typically have them holding no more than 5 percent of their
assets in any one company.
Burnham and the 174 fund managers like him who hold large stakes of
their diversified portfolios in Apple are pulled in two directions:
hoping to prevent an unforeseen drop in Apple shares from upending
their portfolios, while also benefiting from a company whose shares
are up 12 percent this year so far.
"Your positioning in Apple may hold a big sway in how your fund does
overall, particularly in categories like large blend where every
basis point counts," said Laura Lutton, who oversees equity fund
research at fund tracker Morningstar.
In 2014, for instance, funds that underweighed Apple compared to
broad market indexes were the most likely to underperform their
peers, she said.
RISKS
Holding a concentrated position in one company is one way for
stockpickers to stand out as investors move money to passive index
funds. Yet it is unusual for diversified funds like Burnham's to
hold more than 10 percent of their portfolios in one company, said
Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
"Investors may not realize that their fund manager is taking on a
higher amount of risk," he said.
Most fund managers are inclined to take profits when a stock hits 7
percent of a portfolio, yet there are few set mandates set down by
fund firms, Rosenbluth said. He said that he can’t think of any fund
families that have to sell if holdings exceed guidelines as a result
of appreciation.
Diversified mutual funds are allowed by law to add shares of a
company as long as its total weight is below 24.9 percent of their
portfolios overall, but do not have to sell shares if they
appreciate above that level, said Jay Baris, an attorney at Morrison
& Foerster in New York.
BIG BETS
Burham didn't set out to have such a big stake in Apple, he said. He
began buying shares in 2005 when they traded at a split-adjusted
level of less than $7 each. Those shares have now appreciated over
2,000 percent.
"It's the world's greatest company. I just don't see any reason to
sell it," Burnham said, adding that he thinks that the stock should
trade above $200 a share. Shares of the company closed at $123.59 on
Friday.
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His big weighting in the company is also helping his performance,
which may in turn bring in more investor dollars. Burnham's fund,
which also has significant positions in Chipotle Mexican Grill and
Williams Companies Inc, is up 4.8 percent for the year to date,
according to Lipper, a return about 4 percentage points better than
the S&P 500.
Over the last 5 years, the fund has returned an average of 14.3
percent a year, a performance slightly better than average large cap
fund. The fund costs $1.36 per $100 invested, a rate slightly above
average.
Other fund managers with large stakes in Apple who aren't selling
say that they didn't set out to have an oversized position in the
company.
David Chiueh, the manager of the Upright Growth fund, has 13.4
percent in Apple, the second-largest among diversified funds tracked
by Lipper, mostly because shares he bought in 2008 have appreciated,
he said. The BlackRock Science and Technology Opportunities
Portfolio, the third-largest Apple holder, has an underweight
position according to the fund's chosen benchmark, the MSCI World
Information Technology index, a company spokeswoman said.
Other large holders of Apple have started to trim their positions.
Mark Mulholland, whose Matthew 25 fund is classified as a
non-diversified fund, has 15.3 percent of his portfolio's assets in
Apple.
He expects to trim the position down to 10 percent of his portfolio,
in part because the company's shares do not look as attractive on a
valuation basis, he said.
"It's not a company under duress by any means, but it's not trading
at as big as a discount as it was before," Mulholland said.
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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