An Apple a day keeps the consultants away….


Apple is a phenomenal company. But for active fund managers its newly attained $700 billion market cap presents a number of difficulties. WealthiFi has a few thoughts on this…

1. Apple should be celebrated as a remarkable wealth creation story. Its market value if it were expressed in GDP terms would make it the 20th largest economy in the world, slightly bigger than Switzerland.

2. It generated $33 billion of cash in Q4 alone and has amassed a $180 billion cash pile. It plans to give a lot of this back to shareholders. Nice on Planet ZIRP.

3. Its “beat” of consensus earnings forecasts in its latest results will by virtue of its size sugar coat earnings growth for the entire US market. Earnings have been more mixed than they look in aggregate terms.

4. Many active fund managers, actually almost 85% of them, failed to match the performance of their benchmark in 2014. And here’s the problem…

Active managers are now more concerned about performance than the actual fundamental prospects for Apple. Admittedly, the Apple franchise trading on 3.5x sales with such high margins(circa 24%) is not egregiously expensive but that’s a backward looking view. Fund managers are now piling into the stock for career protection reasons and ignoring how a $700 billion company “grows into its valuation”.

The all-important consultants who advise institutional money and monitor funds will, no doubt, be happy that fund managers do not stray too far from index weightings(called index risk) but, as we often say on WealthiFi, that is a bizarrely communist way to allocate investment capital. So celebrate Apple’s achievements and hope that its legacy is not a classic example of straight-jacket career protection at the expense of investment capital.


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