Misreading misleading charts: Alaska edition

August 4, 2011 in Finance

There's a headline making the rounds this morning that caught my eye because it seemed preposterous: "Apple Stock Helping the Alaska Permanent Fund More than Oil." It's everywhere, but the original instigator seems to be this USA Today article.

It looks like nobody bothered to read (or understand) the Fund's actual returns. First of all, the Alaska Permanent Fund collects a portion (25%) of Alaskan mining/oil royalties and invests them. Every year, a portion of the Fund's income is paid out as a dividend to every Alaskan citizen. So right off the bat, oil doesn't "help" the Fund at all. It provides investment capital, not investment income. But if we do want to consider its contribution to the Fund's growth (after all, the headline number is that the Fund crossed the $40B mark for the first time), we can: the APF received about $786 million from oil royalties in 2011 (31.18% of $2.52B). The value of the Fund's Apple stock on June 30, 2011 was $207 million. Already, the discrepancy should be clear -- the incremental contribution of oil royalties to the Fund's assets was almost four times the market value of its Apple investment, let alone the Apple investment's profit.

And let's have a close look at that Apple investment -- most articles report that the Fund's top holding and top performer are both Apple. But that's not entirely true. The performance numbers can be calculated because the Fund reports the market value and cost of its investments, but cost is a historical basis, not cost at the end of 2010. Therefore, calculating returns on that basis doesn't tell us anything about 2011 gains, only lifetime (unrealized) gains. It also excludes any realized gains, which wouldn't show up in the report at all. The Apple number, in particular, must be across many years because the average purchase price is $118, a level the stock hasn't visited since April 2009. So, Apple may be the fund's top unrealized lifetime holding, no argument, but tells me nothing about how it did in 2011.

Some of the articles report with apparent glee that the Apple shares outperformed those of Exxon (and its "messy old-economy product") -- but that's not entirely true either. Exxon shares returned considerably more than Apple in FY 2011 (6/30): 43% vs 33%. The Apple investment gave the Fund a slightly higher dollar return, but that's just because the Fund owns more of it. On that basis, the Fund could put $30 billion in T-bills and call it the top performer because the dollar return of those few basis points of interest would overwhelm its top stock's dollar return. It's factually correct - and good for marketing - but let's not be deceived. I believe, by the way, that the references to Exxon are what the article writers are using to make their "outperformed oil" arguments, not the royalty contribution. Again, in dollar terms, I can't argue with that -- Apple gave the fund $3 million more than one oil company in 2011, but I still think the analogy is ridiculous. Firstly, there's more oil in the portfolio (#9 is Chevron), and more importantly $3 million is three-quarters of one-hundredth of one percent of the Fund assets, or one-half of one-tenth of one-percent of the Fund's 2011 return. Talk about splitting hairs!

The fact is, the Fund is extremely diversified. Apple, it's largest stock position, accounts for just seven-tenths of one percent of the assets. But if we must beat this dead horse, let's at least beat it completely:

  • Is Apple the Fund's largest stock holding? Yes.
  • Is Apple the Fund's top stock performer, in percent? No -- Exxon, at least, outperformed.
  • Is Apple the Fund's top stock performer, in dollars? Maybe -- I didn't bother calculating 2011 returns for every stock.
  • Did Apple contribute more to the Fund's return than Exxon? Yes.
  • Did Apple contribute more to the Fund's return than oil? No, assuming "oil" includes any oil company in the portfolio.
  • Did Apple contribute more to the Fund's growth than oil? Not even close, assuming "oil" includes any oil company in the portfolio plus oil royalties.
I have to think that there is some sort of schadenfreude at work here, leading to the outpouring of copycat articles -- the Alaskan "Oil" Fund grew because of a tech stock, not because of oil! Unfortunately, it's just not the case. I love Apple (and AAPL), but please, let's put some thought into our blind championing of the stock -- or at least take the time to read and understand the APF's investment returns.

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