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Does Holding Apple (AAPL) Really Matter for Funds' Success?

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It was widely predicted that Apple would account for over 5% of the S&P and Dow Jones indices earnings per share in the first quarter of 2015. The prediction turned out to be true. As of May 8th, 436 S&P 500 companies that account for 90.3% of the index’s total market capitalization had reported results. For these 436 companies, earnings improved 2% on lower revenues of 4.1%. The dismal performance would look all the more gloomy once Apple’s numbers are taken out.

Total earnings for the Technology sector, the biggest sector in the S&P 500, improved 6.9% on higher revenues of 7.5%. About 48% of companies from the technology sector outperformed the earnings expectations and 45.8% surpassed revenue projections. However, the sector’s decent numbers were heavily influenced by Apple. Excluding Apple from the tech sector, the first quarter earnings growth rate for the sector drops to negative 2.3% (from 6.9%). Even for the S&P 500, excluding Apple brings the earnings growth down to 0.6% (from 2%).

Apple’s influence is not solitary to first quarter results. If we look at fourth quarter 2014 numbers, the tech sector had reported 14.2% earnings growth on 10.1% higher revenues. Taking Apple out, earnings growth for the tech sector drops to 5.2% and revenues slump to 3.4%. Looking at the 4-quarter average, without Apple earnings growth is 7.6% on 6.3% higher revenues. Including Apple, earnings growth moves up to 10.2% and revenue growth is 8%.

Also Read: Best-Performing Technology Mutual Funds of Q1 2015

The influence of Apple is thus undeniably important. Also, excluding Apple the tech sector returns paint a dismal earnings picture. For mutual fund investors, it is rational to be concerned about the holdings of their tech funds. Many investors believe that high Apple stock ownership in a funds' holdings will provide them with the best gains in the sector. Apple has indeed been a great growth and profitable story. However, let’s look at how some funds have performed that did not hold Apple or it did not hold it in the top 10 holdings.

No Apple Boost for Best Performing Tech Fund

According to Lipper, Fidelity Select IT Services Portfolio (FBSOX - Free Report) has been the best-performing technology fund since the dot com bubble. It has returned 10.9% per year since Mar 10, 2000. This is more than double the return of other tech funds tracked by Lipper. Todd Rosenbluth, director of mutual fund research at SP Capital IQ said: “This is a fund that doesn't have Google, doesn't have Microsoft. This is a wholly different subset of technology than most investors are familiar with”.

The fund focuses on companies involved in providing information technology services. The fund’s top two holdings are in fact payment processing firms, Visa and MasterCard. Kyle Weaver, portfolio manager of the fund, said: “We're looking for companies that have a high degree of recurring revenue that aren't very glamorous and operate in the background of our lives instead of front and center”. Others include Fidelity National Information Services, Accenture PLC and lesser known Vantiv. The only prominent tech name in the top 10 holding is IBM.

Since Mar 10, 2000, this Zacks Mutual Fund Rank #3 (Hold) fund has returned over 180%. Fidelity Select IT Services Portfolio’s 3 and 5 year annualized returns are 25.6% and 21.3%, respectively. FBSOX boasts year-to-date and 1-year returns of 11.8% and 27%, respectively.

Funds with Apple versus Funds without Apple

Let’s look at the performance of some of the technology funds that hold Apple and others that don’t. All these funds however carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy).

Funds Holding Apple:


Funds without Apple in Top 10 Holdings:

The best 3 and 5-year annualized gains came from ProFunds Internet UltraSector Service (INPSX - Free Report) , which does not hold Apple in its top 10 holdings. INPSX, a Zacks Mutual Fund Rank #2 fund, gained 35.8% and 27.9% over the last 3 and 5 years. In comparison, the best annualized 3 and 5 year gains for funds holding Apple was 27.5% and 20.7%. This came from Zacks Mutual Fund Rank #1 fund USAA Science & Technology (USSCX - Free Report) , which has 7.7% invested in Apple.

T. Rowe Price Global Technology (PRGTX - Free Report) and Fidelity Select Electronics Portfolio (FSELX - Free Report) had the next best 3-year annualized gains of 29.1% and 28.4%. On the other hand, the next best gains from funds holding Apple were 22.2% and 21.3%. These gains were achieved by Buffalo Discovery (BUFTX - Free Report) and BlackRock Science & Technology Opportunities Portfolio Investor A (BGSAX - Free Report) which have 3.3% and 11% of assets invested in Apple.

While FSELX and BUFTX carry a Zacks Mutual Fund Rank #1, PRGTX and BGSAX hold a Buy rating.

Other funds that do not carry Apple, Fidelity Select Software & Comp Portfolio (FSCSX - Free Report) , T. Rowe Price Science and Technology (PRSCX) and Columbia Seligman Global Technology A (SHGTX - Free Report) also notched up strong gains. However, SHGTX’s 5-year annualized gain (the lowest in the list) was short of the lowest 5-year gain for funds holding Apple. FSCSX and SHGTX carry a Zacks Mutual Fund Rank #1, while PRSCX holds a Zacks Mutual Fund Rank #2.

If we do a simple average calculation, average 3 and 5-year annualized return averages for funds without Apple are 26.7% and 20.1%. These outperform the average 3 and 5-year annualized returns of 22% and 17.4% from funds with Apple.

Though the impact of Apple cannot be denied, it is also true that effective fund management and right stock pickings can help funds too. Technology has emerged over the years to cherish potential performers like semiconductors and cloud computing among others. A well diversified fund with investments in advance science and technology, Internet, data, cloud computing and also semiconductor among others should see increased gains when the fund is managed effectively.

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