Big tech has played the biggest part in the market's rally this year. Yet it isn't an entirely new phenomenon -- just look at Apple stock over the past half-decade.
Much has been made about how just a small number of megacap tech companies have been the driving force behind 2023's rally, even as many other stocks lag behind. Apple (ticker: AAPL) has surged more than 33% since the start of the year, crushing both the S&P 500 and the tech-heavy Nasdaq Composite's returns, and making it the second-best performing FAANG stock behind Facebook parent Meta Platforms $(META)$.
It isn't a new story: Before tech stocks' rout in 2022's bear market, the FAANG+M cohort -- a shorthand way to refer to tech giants Meta, Apple, Amazon.com $(AMZN)$, Netflix $(NFLX)$, Google parent Alphabet $(GOOGL)$, and Microsoft $(MSFT)$ -- had enjoyed a long run of massive gains.
Managers with relatively low exposure to such tech heavyweights might be kicking themselves right about now. In fact, the outsize influence of tech companies on active mutual funds' returns over the past several years is especially evident from looking at a single variable: Whether or not these funds have owned Apple stock.
In a note to clients Wednesday, Wells Fargo analyst Christopher Harvey points out a "recurring theme" -- that a lack of just Apple in a portfolio has been enough to fuel manager underperformance. The note is part of his ongoing series examining active managers' returns.
Harvey's data point to a particularly hefty contribution by Apple year to date: With Apple, the S&P 500's total return stands at 8%, compared with 6.2% when excluding it. The iPhone makers' impact is clearly visible going farther back as well.
Apple has accounted for more than one-tenth of the S&P 500's total return since 2018, Harvey says. Since the last day of 2017, the S&P 500's total return has been 69.3%, while Apple's has been 329.1%. Stripping out Apple, the index's return over that period is lowered to 59%.
Harvey uses this data to show that tech more broadly has become too make-or-break for active portfolios.
"A reluctance to embrace uber-caps remains too big a hurdle," causing large-cap managers to lag behind the broader market in 2023, Harvey writes.
While some other big tech players' rallies seem to hang on relatively modest fundamentals, Apple just reported a much better-than-expected quarter, bolstered by iPhone sales. It marks the latest in a string of examples as to why the investment case for the stock still stands.
Money managers who have bet against it this year -- and in the past -- keep learning the hard way.