Apple Shares Are Too Tempting

Apple Inc.'s surging shares have prompted hundreds of mutual funds to buy the stock—including many that aren't expected to invest in a giant, U.S.-based technology company that pays no dividends.

At least 50 small-cap and midcap mutual funds—which focus on small and midsize companies—own Apple, the world's largest company by market value, according to analyses for The Wall Street Journal by market-data firms Morningstar Inc. and Ipreo Holdings LLC. Non-U.S.-focused funds also own it. Apple doesn't pay a dividend, but about 40 dividend-focused funds hold its stock. And Apple shares can be found even in one high-yield bond fund.

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Close Photo illustration by Justin Metz for The Wall Street Journal Apple of Investors' Eyes

Managers pile into company's shares despite their fund descriptions.

40 dividend-focused funds own Apple, which has never paid a dividend.

50 small and midcap funds own Apple, the biggest of the big caps.

Although such moves are permitted by securities rules and have so far paid off because of Apple's successes, they could expose investors to unexpected risks should the company falter. They also underline the leeway given to fund managers when choosing investments even when they explicitly contradict their stated objectives.

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Apple CEO Tim Cook

"It would clearly be inappropriate for a midcap fund to hold Apple. You've got to say that manager is violating his reason for being," says John C. Bogle, founder of Vanguard Group. "I can't help but believe that is going to end up in disappointment for his shareholders. I don't know when, but it will."

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The reason Mr. Bogle and others are concerned: Many investors in these funds may not realize they have exposure to Apple, and indeed may have invested in the funds to get exposure to a different segment of the market. Investors' concentration in Apple raises the risk that a big reversal in its shares would reverberate beyond the technology sector.

Apple's popularity with investors of all stripes is a testament to its historic climb. The stock has soared nearly sevenfold since its March 2009 lows. In the past year alone, Apple has jumped 61% to close Tuesday at $568.10 a share, an all-time high. The gains helped push the Nasdaq Composite Index, where Apple is the largest weighting, to close above 3000 on Tuesday for the first time since late 2000.

Robert S. Bacarella, president and portfolio manager at Monetta Mutual Funds in Wheaton, Ill., targets companies of up to $10 billion in market value for his Monetta Mid-Cap Equity Fund. He made an exception for Apple.

"I'm going to hold it until it gives me a reason not to," says Mr. Bacarella, whose firm manages about $100 million. "If you have a good company, why shouldn't you let it run?"

Under a 2001 securities rule, managers like Mr. Bacarella can apportion up to 20% of their portfolios to investments that aren't part of their mandate. Funds discuss this flexibility in their prospectuses, which are published online, and disclose their holdings in quarterly reports. But few investors read them, and some financial advisers admit they don't always scrutinize quarterly updates.

If they did, they would find some of the biggest names in investing have reached beyond their stated focus. BlackRock Inc.'s $5.9 billion High Yield Bond Fund held Apple shares worth $8.3 million at the end of 2011, according to Morningstar. BlackRock declined to comment.