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How Advisors Can Avoid the Nightmare of Apple in Portfolios

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Apple has been big in the news lately and for lots of big reasons, not least of which is the spectacular run-up in its stock price. All of a sudden, it seemed, the world’s greatest tech company was worth more than half a trillion dollars, making it far and away the largest publicly traded company on the Street. The good news is many investors have knowingly benefitted, some tremendously so, from the stock’s rise. The bad news is probably just as many would be shocked to find how many shares of Apple they own in unexpected places in their portfolios. 

Truth be known, a good number of mid- and small-cap strategies hold the biggest-cap stock on the planet, as do several dividend-focused strategies. Even BlackRock’s High Yield Bond Portfolio owned Apple ahead of the company’s recent announcement that it would begin paying dividends. What’s it matter as long as everyone’s making money? It matters a lot to advisors aiming to construct style-pure portfolios.  

Understand the Nuances

In reality, most portfolio managers’ investment guidelines are far more flexible than the name of the product might suggest. Some mandates are actually vague enough that a manager can invest within any part of the market to pursue the stated objective. Equity managers, for example, often have almost unlimited room to play with market cap and style—sometimes even geography—as the market environment shifts. Good for the manager, maybe, but a nightmare for advisors trying to build a style pure portfolio for their clients. 

Fortunately, good due diligence on a fund’s investment process will help you better understand how far the manager can invest beyond his or her stated limitations. For example, you might find that a manager is required to sell a holding when it exceeds the upper bounds of the portfolio’s defined market cap range. Others, you’ll find, have the freedom to continue to hold in that scenario, also known as “letting a winner run.” While this may benefit the manager’s performance (or not), it clearly can lead to unwanted overlap between the underlying managers in your client’s portfolio. Knowing the difference is crucial.

Dive Into the Data

When you’ve hired managers to represent specific asset classes, capitalizations, and styles, reviewing current and past holdings helps to prove or disprove their buy and sell disciplines. Holdings-based style analysis can be used to confirm the consistency of a strategy beyond the buy and sell disciplines described by the manager. 

To that point, the PrimaGuide style concentration chart shown below depicts where a sample small-cap value equity strategy is currently invested (name withheld to protect the innocent).

As you would hope, this manager is primarily invested in the fund’s primary style box. A fair level of assets in core and growth hint that this manager may invest in a relative value style, while 25% of assets invested in mid cap (defined as $2 billion to $10 billion) indicate the manager has let winners run.

Next, look at the style concentration over several years. This chart bears out the previous observations; there has been varying exposure to mid cap, core, and growth stocks over time. The style exposures can change for a variety of reasons, from shifts in the market to active decisions made by the manager.

These observations remind us that strategies cannot be considered in a vacuum. Statements by the manager must be considered within the bigger picture to confirm or deny what the holdings-based style analysis seems to indicate.

Finally, viewing a scatter-plot chart of stocks across style and capitalization axes, the granular level if you will, gives you direct feedback on which holdings are outliers and to what degree.



If the manager indicated that he will not hold positions greater than $10 billion, the chart would bear that out. Seeing otherwise would demand an explanation from the manager as to why he departed from the strategy’s stated market cap limitation. The answer will determine your comfort with the relative strictness of the portfolio construction process.

We can all agree that understanding a fund’s underlying investment strategy is absolutely critical if you’re looking to build style-pure portfolios. We can also agree that due diligence is the only way to protect your clients from unwanted surprises like overlapping holdings or style drift. Bottom line is this: Utilize holdings-based style analysis and compare your observations to what the manager says to get a better sense for whether or not they run a style pure strategy. 


Author’s disclaimer: Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. Any mention of a specific security is for illustrative purposes only and is not intended as a recommendation or advice regarding the specific security mentioned.


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