Why do Fund Managers Hate Apple?

Stocks opened the week slightly lower Monday morning, with the Dow Jones Industrial Average (^DJI 0.06%) and the broader S&P 500 (^GSPC -0.22%) down 0.2% and 0.3%, respectively, at 11:30 a.m. EDT. Investors, analysts, and the media will be following Apple's (AAPL -0.57%) multiday Worldwide Developers Conference, which begins at 1 p.m. EDT today. This is a huge media event that will be live-blogged by numerous outlets. Consumers and journalists love Apple, but, curiously, one constituency doesn't appear to share that affection: fund managers. Why?

First, let me back up my assertion. Research firm FactSet last month published an analysis of the stock portfolios of the top 50 hedge funds. In terms of the market value of the aggregate position across the 50 funds, Apple was their largest holding; however, the position represented just 1.8% of the funds' stock holdings -- less than half of Apple's weighting in the S&P 500 index!

I don't have equivalent data for the top 50 mutual funds, but the following table shows that among three of the largest equity funds -- the American Funds' Growth Fund of America, the Fidelity Contrafund, and the Dodge & Cox Stock Fund (combined assets: $320 billion) -- only the Fidelity Contrafund has a position in Apple that is roughly in line with the company's weighting in the S&P 500. The Dodge & Cox Stock Fund doesn't own a single share!

*As of March 31, except for the Fidelity Contrafund (April 30).
Source: Fund company websites and documents.

I found the lack of ownership in the Dodge & Cox Stock Fund surprising, particularly in the context of its strategy:

The Fund focuses on the underlying financial condition and prospects of individual companies, including future earnings, cash flow, and dividends. Various other factors, including financial strength, economic condition, competitive advantage, quality of the business franchise, and the reputation, experience, and competence of a company's management are weighed against valuation in selecting individual securities.

I can't think of a company that scores more highly across Dodge & Cox's criteria than Apple, which leads me to conclude that the fund's managers believe the shares are overvalued -- perhaps egregiously so. While I think Dodge & Cox is an outstanding money manager, I don't agree. I don't share Carl Icahn's view that the stock is worth $240 today, at 12.9 times forward earnings per share, before adjusting for the company's cash position. Apple's stock looks very reasonably priced -- in a stock market that looks expensive.