We all know Apple (AAPL) has had a tremendous decade of growth, but just to explicitly remind you how astronomical it has been, below is the table of Apple's yearly performance. The stock has been up nearly every year by sensational amounts, and even though 2013 was a rocky year, it still managed to put forward a positive post.
What is more interesting about the quality of Apple's return, however, is that the correlation to the broader market is at an all-time low. I graphed the 120-day daily rolling correlation to the SPX index, and it is at a decade low of 12% (having peaked as high as 80% from 2008-2011).
(click to enlarge)This signals that Apple is becoming a source of diversification to the broader market, believe it or not, and may even be a source of true alpha generation going into 2014 after a lackluster 2013 with what many agree has resulted in cheap valuations at 12x PE (when the SPX index itself is at 17.5x today). Out of curiosity, I looked into who the smart money institutional owners of Apple are, and I was surprised to find an eclectic collection of well-respected hedge fund managers that are each known for their unique and proven investment strategies.
Top 5 Hedge Fund Holders Explained
If you look through the Top Holders of Apple on Hedgemony (www.hedgemony.us), you can observe that there is an array of institutions - from banks to sovereign wealth funds. I sorted the list by "percent of Portfolio" which is what I think remains the best proven metric of the investment thesis conviction. While percent of shares outstanding is important to gauge size in market, a portfolio manager's conviction is only reflected by sizing within his fund assets. Of the 100 fund holders that have sized Apple to be 4.5% or greater, I share with you the top five hedge funds that remain relevant players today. I will provide you a brief biography so that you understand their pedigree and investing philosophy, which may perhaps even motivate you to peak into what other stocks they own so that you can gather new intelligence if their investing philosophy is in line with yours.
|Shares||% of Portfolio|
|Empire Capital Management||180,000||9.89%|
1) Greenlight - Long term value + activism
David Einhorn really needs no introduction to anyone who follows the hedge fund industry. A Cornell graduate, Mr Einhorn has demonstrated success not only in long positions but also in shorts through some various highly publicized inquiries (there was Green Mountain (GMCR), Chipotle (CMG), and even Herbalife (HLF) at one point before the infamous you-know-who got involved). He has returned ~20% annually for almost two decades, with a beta less than half and now currently runs close to $5 billion. His investing philosophy tends to be very long-term oriented so his portfolio does not turn every quickly. In fact, comparing quarter to quarter on his 30 stocks according to the 13Fs, only three are new initiations in Q3 2013, and of the remaining 27, 16 of them didn't even change in sizing. That's value investing. And guess how much Apple Greenlight owns? A whopping 20.3%. In fact, it's his largest position in the portfolio and if there's any career investor you can trust who did his homework, it's Mr. Einhorn. Regarding his activism, he has advocated for an efficient reorganization of the capital structure; a similar theme was more recently repeated by Carl Icahn himself. While suing Apple initially was probably not the friendliest of actions, he remains level-headed in the pursuit of several share buyback arrangements that have been received positively by Tim Cook. 2014 may be the year that everyone waited for the release of Apple's cash to determined investors. Fun fact: he is also related to Sheryl Sandberg as cousins, for what it is worth.
2) Andor - Technology guru + concentrated risk
Andor Capital is run by a guy named Dan Benton, ex Pequot. It is a technology specific hedge fund with reported assets north of $1bn of which a significant chunk were from investment gains itself. The firm suffered horrible losses in 2008 during the financial crisis and was temporarily shut down, so risk management is not the strongest suit. The firm employs a traditional long short strategy, but is known for taking very concentrated positions (15-25 names), with the top 5 names to account for over half the risk during various cycles - potentially the reason why the firm faced such difficulty in 2008. His most notable longs in 2013 were Google (GOOG), Cirrus Logic (CRUS), Mellanox (MLNX), eBay (EBAY), among others. Today, his top position remains Facebook (FB), but Apple is a close 2nd.
3) Valiant Capital - International markets focus + Tiger grandcub
Valiant Capital is a $2.5bn long short fund managed by Chris Hansen, a member of the Tiger family. It was founded in 2008, and Chris was formerly an MD at Blue Ridge Capital for over five years. His performance unfortunately in 2013 was lousy - most likely due to shorts, and his past performances has been mediocre as well. Also important to note is that he invests internationally (60%+ of his longs are non-US) - and emerging markets generally has had a tough environment, especially India and Brazil. Regardless, Mr Hansen is a stubborn investor who sticks to what he knows and likes best - and he likes value and shorts frothy fraud-like names of utmost exuberance. This didn't work in 2013 with the social media frenzy and general appetite for multiple expansion, but his pedigree and value-oriented picks should give comfort to why Apple remains a strong buy from a macro angle beyond the US stock market.
4) Empire Capital - Longevity
Empire Capital is arguably the least known fund on this list - and that's perhaps because the fund is a lot older than others (which is a good sign and the reason for my inclusion of conviction). It is run by Scott Fine and Peter Richards, and is one of the oldest technology hedge funds in existence, having launched in 1996. Apple remains their 2nd largest position. The conviction I get from Empire Capital being on the list is that they are one of the few tech funds to have experienced the tech bubble and then survive to rise. My guess is that they are careful in their longs being fundamentally sound and not momentum driven, as a survival period of ten-plus years in the tech investing space is a testament to its own success. There are not even many technology firms themselves that last that long.
5) Nokota - Event Driven + Tactical
Nokota, saved for last, is nonetheless a compelling addition to the roster. Nokota, founded in 2011, is run by two guys named Matt Knauer and Mina Faltas. What is truly outstanding about this firm is that both PMs come from two of the most successful hedge funds ever - Appaloosa Management and Viking Global Investors. In fact, David Tepper helped seed Nokota, which is a strong signal of conviction for his fellow analyst. Nokota tends to traffic in event-driven names and situations, where a tactical component is maintained to dynamically mange the risk from a top-down level in addition to being fundamentally driven. It combines the best practices of both worlds thanks to the PM's complementing experiences. They own Apple through options, which is an interesting implementation that signals that there may potentially be the necessary event in the short-term to capture outsized volatility in the right direction. Nokota also tends to own relatively unknown names, so seeing a brand name like Apple on the list makes me believe that it is compelling beyond general expectations.
What I have tried to highlight is that of the five hedge fund holders on the list that are each known for different expertise, Apple remains an outsized top position for all in unison. Be it fundamentally value driven with an activist component, or a tactical overlay to an event-driven strategy, by sector generalists or technology gurus, from 1996 launches to 2011 newly minted managers, it really is the most solidly diverse source of conviction that anyone can ask for. It is when such consensus among varied investors is reached that an average investor can gain conviction in joining the camp. Sometimes, it is just as simple as that - you win by following the smart money ahead of you.