There is a very real thing going on in the investment management industry that few talk about publicly – the pressure being exerted on PMs because of how outsized and significant Apple ($AAPL) has become in the indices everyone is chasing and fixated upon. No one, to my knowledge, has written about the psychology of a money manager through this prism but I think how Apple is “treated” by managers is now very similar to how gold was “treated” last year – it has become a litmus test of sorts.
And then there are the clients. And the calls from clients that go “Why don’t we own more Apple,” or “Why don’t we just put it all into Apple?”
Tom Brakke has finally written the post on this topic that needed to be written…
From Research Puzzle:
Therefore, as an investment manager, what should you do with Apple? It has an outsized impact on your benchmark due to its size — and it has been on a tear. Do you overweight it or underweight it or hug its index weight? That decision will likely be the biggest single driver of your relative performance. If you don’t think that matters to the person making buy and sell decisions, you haven’t sat in that chair.
But it’s not just relative weighting. Imagine going to a road show where you sit with portfolio managers from other firms. “How much Apple do you own?” is likely to be a question from one of them before long. What do you say? What do you want to say?
How about visiting a pension plan for a quarterly review meeting, with numbers that lag the index because you don’t have any Apple? Where do you think that conversation is going to go?
This pressure is a very real thing and as Tom notes, how one treats Apple within his portfolio could become one of the single greatest determinants of under- or over-performance given its weighting.