written by Hank Coleman
Mutual fund managers are getting confused. It seems like more fund managers are deviating from their fund’s stated focus and suffering from style drift in order to own one of the hottest stocks of the past decade. More than 40 dividend funds have recently bought shares of Apple even though the company does not yet issue a dividend. Even mutual funds that focus on small companies have gotten into the act. Over 50 small capitalization and mid-cap mutual funds have bought shares of Apple stock even though the company’s ballooning share price has made it the largest company in the world. Is this new development a good trend? Or, is it something to worry about?
Signs Of Things To Come?
Many people have predicted that Apple will begin to offer a dividend to its shareholders this year. Do these dividend funds know something that the rest of the public does not? Or, are they simply anticipating the inevitable? Apple has almost $100 billion of cash on its balance sheet and very few options for the money. Shareholders and critics alike are clamoring for Apple to do something with its horde of cash whether it is through acquisitions, share buybacks, or issuing a dividend. With that being said, the prospects of a quarterly dividend in the immediate future for Apple is not necessarily a foregone conclusion though.
Should You Be Worried?
Is it the end of the world that dividend funds are purchasing shares of Apple before there is even a promise of a distribution to shareholders? No, it is not the worst thing to happen especially with the stock doing so well, but it definitely calls into question where these funds are headed in the future and what their limits are as to where they can go with our investments. For example, how much of your domestic stock fund can invest in foreign companies? Exactly what percentage of your global fund can hold stocks of companies that are right here at home? If dividend funds can purchase shares of companies who do not distribute profits to investors, where does it end? There is another danger, and investors risk losing diversity when fund managers drift from their fund’s stated style. Investors could find themselves quickly becoming overweight in Apple stock as more mutual funds across styles clamor to own its shares.
How To Protect Yourself
This latest episode of dividend funds, small cap mutual funds, and even one junk bond fund purchasing shares of Apple illustrate how little most of us know about what our funds are actually investing in. While we all receive the prospectuses of our mutual funds in the mail, how many of us actually read those large reports? Unfortunately, investing in mutual funds isn’t always as passive an investment as we would like for them to be. Granted, they do not require as much close attention as investing in individual stocks. But, investors would be mistaken to set their mutual fund investments on autopilot and not monitor them a little more closely. How many more examples, like buying shares of Apple, are out there lingering in the portfolios of our funds that we are not aware of?
Style drift in your mutual funds, where a fund manager diverges from the fund’s stated mission, can have serious consequences to investors. It is akin to breaking a promise with shareholders, and investors could be quickly surprised without realizing their mutual funds are diverging unless you stay on top of things.
Is it a big deal that dividend funds are investing in Apple before they even start issuing a dividend? Does it matter if the funds are earning a great return with capital appreciation? How close do you follow your mutual funds, their styles, and how much they drift?