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Shunning Apple tops list of wrong market calls in ’14

By Lu Wang and Oliver Renick

Bloomberg News

NEW YORK – The big money doubted Apple this year. Oops.

“It’s been a really confusing year,” said Kim Forrest, an analyst at Fort Pitt Capital Group Inc., which oversees about $1.7 billion in Pittsburgh. “There have just been a handful of stocks that drove the market and Apple was obviously one of them. It’s been tough.”

Aversion to the iPhone maker is turning out to be one of the worst blunders in 2014 for money managers, who are trailing benchmark indexes by the most in almost a decade. Shares of the world’s largest company rose four times more than the Standard & Poor’s 500 Index as Chief Executive Officer Tim Cook’s product plans eased concern over the company’s future growth.

Investors who clung to winners from the first five years of the bull market, from Internet companies to small caps, got burned in the sixth as chipmakers, utilities and dividend shares rallied. In many ways, 2014 was the year of the hated stock. One of the best things you could’ve done was own companies with the highest short-selling interest and the lowest analyst rankings, according to data compiled by Bloomberg. Such a strategy would have steered you to Exelon and Micron Technology, with average gains of 26 percent since January.

Going against the grain now would lead you to buy energy shares, the industry whose 2014 loss is triple the next worst-performing group in the S&P 500.

“Unloved companies tend to be the most interesting hunting ground for future outperformance,” said Bill Nygren, of the Oakmark Select Fund based in Chicago. “The reason that Intel and Microsoft were able to do so well is that they were so unpopular.”

Like their colleagues in the bond market, many equity managers entered the year believing economic growth would pick up and interest rates rise. They avoided defensive stocks such as power generators and loaded up on retailers and other industries that benefit when Americans spend money on nonessential goods.

Instead of rising, yields on 10-year Treasury notes fell to 2.08 percent from 2.88 percent a year earlier, as central banks from Europe and Japan boosted monetary stimulus in a bid to spur growth. That fueled a surge of at least 20 percent in utilities and REITs, two groups whose dividends are among the highest. Consumer discretionary shares rose half as fast as the rest of the market.

Along with Cupertino, Calif.-based Apple, Intel in Santa Clara, Calif., and Redmond, Wash.-based Microsoft, account for 22 percent of the S&P 500’s 154-point advance so far this year after rallying an average of 34 percent. None was a consensus pick of money mangers, according to data compiled by Goldman Sachs.

As a consequence, eight of 10 funds focusing on large growth stocks are trailing their benchmark, the second-highest proportion since 2004, data compiled by Chicago-based Morningstar Inc. show. About 87 percent of funds that purchase the biggest value shares gained less than their benchmark measure, as did almost 90 percent of the mid-cap funds.

Among some 278 funds that are benchmarked to the S&P 500 and have at least $500 million in assets, only a fifth hold Apple shares more than their representation in the index, according to latest regulatory filings compiled by Bloomberg. These funds have returned an average 8 percent this year, compared with 6.1 percent from those that have no stake.