What Is Apple's 'Not-So-Secret' Hedge Fund Up To Now?

Jul.31.13 | About: Apple Inc. (AAPL)

By: Jake Mann

It's that time of the year again folks. Not once but twice we've discussed the cash management decisions of Apple (NASDAQ:AAPL)'s secret turned not-so-secret hedge fund, Braeburn Capital, here on Seeking Alpha.

Now, the reason we say that Braeburn is not-so-secret is because since it was originally detailed in a fine Zero Hedge piece last October, the term "Apple's secret hedge fund" has been thrown around more times than Gene Munster can falsely predict the launch date of an Apple TV.

In all seriousness, though, Apple's latest conference call shed some light on one of the most important fiscal indicators at Cupertino: total cash. According to Peter Oppenheimer, who usually discusses the details of Apple's finances instead of Tim Cook, the tech giant ended its fiscal third quarter with $146.6 billion in "cash." As always (and why we have "cash" in quotations), this figure includes a good deal of short-term and long-term marketable securities, which are managed by Braeburn.

Let's take a look under the hood of Apple's cash breakdown in its most recent 10-Q.

How much "cash" does Apple have now?

On an aggregate basis, Apple's total cash hoard has increased by 26.6% in three quarters since the end of its 2012 fiscal year. At the end of FY2012, Apple had just over $120 billion in cash, cash equivalents and marketable securities, and with its latest $146.6 billion figure, that puts Apple more or less on track to hit Andy Zaky's $300 billion target by the end of FY2015.

Thinking of this trajectory another way, here's what two scenarios would look like over the next nine quarters:

Quarter

Cur-Growth

Lo-Growth

Q3 FY2013

$146.6B

$146.6B

Q4 FY2013

159.5b

153.0b

Q1 FY2014

173.5b

159.7b

Q2 FY2014

188.8b

166.8b

Q3 FY2014

205.4b

174.2b

Q4 FY2014

223.5b

181.8b

Q1 FY2015

243.1b

189.8b

Q2 FY2015

264.5b

198.2b

Q3 FY2015

287.8b

206.9b

Q4 FY2015

313.2b

216.0b

Click to enlarge

As you can see, the current growth scenario on the left is assuming Apple's cash hoard would maintain the present growth rate it has experienced over the past three quarters: an average of 8.8%. The low-growth scenario on the right assumes that Apple's growth rate falls by half over its next nine fiscal quarters, which would still allow it to surpass the $215 billion mark by the end of FY2015.

The point of the chart isn't to make any wild projections, though. Put simply, it's important to understand that even on the low side, Apple is all but guaranteed to have at least $200 billion in cash, cash equivalents and marketable securities by the end of its 2015 fiscal year.

Now, Apple is planning on the size of its capital return program to hit $100 billion by the conclusion of September 2015, which "translates to an average of about $30 billion per year," according to Oppenheimer. Taking this into consideration, still, we expect the low-growth scenario presented above to remain very much in play.

How much of its cash hoard does it keep overseas?

One very important fact that Peter Oppenheimer mentioned in the Q3 conference call was that $106 billion of Apple's total cash hoard was kept offshore at the end of its June quarter, which equates to just over 72% of its entire pile of dough.

This mark is nearly on par with Apple's average over the last few quarters; in fact, Apple is holding a slightly higher percentage of its cash hoard offshore now than it has in a while.

At the end of its 2012 fiscal year, Apple held approximately 68% of its cash hoard offshore, and by the end of Q2 FY2013, this figure had risen above 70%.

It's difficult to draw any overarching conclusions from this trend, other than to say that as Apple's total cash hoard continues to balloon, it is moving a greater portion of these assets out of the U.S.'s tax domain.

How is Apple investing its cash hoard?

Now to the good stuff; see, we'd also like to take a look at how Apple and Braeburn are managing the company's $146.6 billion.

According to the 10-Q, Apple preferred U.S. Treasuries and commercial paper to U.S. agency securities (issued by Fannie or Freddie), and it kept its investments in corporate securities, municipal securities, and asset-backed securities nearly constant from the previous quarter.

 

 

Asset Type

Q3 FY2013

Q2 FY2013

Growth from previous quarter

Cash

$6.1B

$5.8B

+5%

Money market funds

1.8

2.0

-10%

Mutual funds

3.7

3.9

-5%

U.S. Treasuries

31.2

25.6

+22%

U.S. Agency securities

18.1

21.2

-15%

Non-U.S. securities

4.7

5.1

-8%

Time deposits

2.1

2.5

-16%

Commercial paper

2.9

2.1

+38%

Corporate securities

54.1

55.1

-2%

Municipal securities

6.3

6.4

-1%

MBS and other ABS

15.0

14.7

+2%

Total

$146.6B

$144.6B

1.3%

Click to enlarge

Another way to think about this chart is by noting that in terms of aggregate growth, Apple's entire cash hoard grew by 1.3% on a quarter-over-quarter basis. With this fact in mind, one can simply compare this figure with other asset-specific growth rates to determine if the company was over-investing in one asset class versus another.

The asset classes that Apple and Braeburn were over-investing in are as follows: cash, U.S. Treasuries, commercial paper, and asset-backed securities.

Likewise, the assets that Apple and Braeburn were under-investing in are money market funds, mutual funds, U.S. agency securities, non-U.S. securities, time deposits, corporate securities, and municipal securities.

Final thoughts

Obviously, with over 70% of this cash hoard locked up overseas, it's difficult to know what these asset allocation moves actually mean for Apple's future, per say, but it's still important to track.

If you're interested in the quantity of Apple shares that mega-fund managers like David Einhorn or Jorge Paulo Lemann hold in their equity portfolios, be sure to check out Apple's free profile page in Insider Monkey's hedge fund database.

Furthermore, if you're wondering why we'd even mention these money managers, it wouldn't be a bad idea to learn why you should dump your hedge fund altogether.

Disclosure: I am long AAPL.

Business relationship disclosure: This article is written by Insider Monkey's writer, Jake Mann, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.