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Worm wiggles itself into Apple stock

The market punished Apple after its fourth-quarter earnings report.

Institutions feel pain caused by share drop, but no one panicking

Institutional investors usually don't feel the impact of a single stock's price drop, but the woes inflicted by Apple Inc. in recent weeks are an exception.

Following the release of the company's disappointing fourth-quarter earnings report on Jan. 23, the stock fell 12.4% in a single day. According to 13-F filings, that translates to a paper loss of $2 billion for 33 pension funds that manage equities internally.

Apple stock closed at $702.10 on Sept. 19, a record high, then fell to $439.88 on Jan. 25, the lowest since Jan. 24, 2012.

The value of the Apple stock held by the 33 pension funds fell $9.2 billion during that time.

The impact to the institutional investing community is significant, according to Ben Olmstead, head of product strategy at eVestment LLC, Marietta, Ga.

Apple, based in Cupertino, Calif., is by far the most significant holding in stock portfolios overall. Apple stock makes up 6.8% of the average institutional large-cap growth portfolio, more than twice as much as the next stock, Google Inc., which makes up 2.83%.

“When we look at large-cap growth, we would expect to see Apple,” said Mr. Olmstead. “What is sort of interesting is that when we start to look across the eVestment Alliance universes, it's really the top-held security across eight major universes.”

The eVestment universes in which Apple is the top-held security are: U.S. large-cap growth equity, U.S. large-cap core equity, U.S. all-cap growth equity, U.S. all-cap core equity, global large-cap growth equity, global large-cap core equity, global all-cap growth equity and global all-cap core equity.

While predominately seen as a large-cap growth stock, Apple also has a presence in large-cap value portfolios, where it has an average weighting of about 2.8%, according to Mr. Olmstead.

The most widely held stocks overall in large-cap value portfolios are J.P. Morgan Chase & Co., at 2.04%, and Exxon Mobil Corp., at 1.93%.

But for growth portfolios, Mr. Olmstead said institutions hold Apple stock “head and shoulders” above the next most widely held stock. According to data from eVestment, 75% of U.S. large-cap growth managers had more than 5% of their portfolio weighting in Apple.

Although institutional investors overweight or underweight in Apple in 2010 and 2011 kept those positions, a shift began in the second half of 2012. “We started to see more selling going on, managers moving out of Apple; because of the risk in a single security there was a change in the institutional side,” said Mr. Olmstead.

Christopher Ailman, chief investment officer of the West Sacramento-based $154.3 billion California State Teachers' Retirement System, told board members in April 2012 to consider purchasing put options because of the volatility of Apple stock. The board decided not to make the purchases and hasn't discussed it since then, according to a CalSTRS spokesman.

While Apple's impact on portfolios was great, the price drop isn't surprising, said Chris Brightman, director and head of investment management at Research Affiliates LLC, Newport Beach, Calif. Research Affiliates officials had predicted in a paper last June that Apple's stock would have to drop because it was the market leader.

“No matter how you define a market leader, and we looked at many ways to do so, there were many different ways to define the top dog, the market's darling,” Mr. Brightman said.

“I would say the recent fall from grace of Apple is not a new phenomenon, but just continues a long and very consistent history for the top dogs in any sector.”

Data Editor Timothy Pollard contributed to this story.

This article originally appeared in the February 4, 2013 print issue as, "Worm wiggles itself into Apple stock".