Mutual Funds Boost Returns With Unicorn Markups
Boston/San Francisco (Reuters) – Some U.S. mutual funds are boosting their performance with relatively big bets on private companies such as Uber and Pinterest, which they have been marking up at a rate far greater than the broad stock market.
Relied upon by millions of Americans to save for their retirement, mutual funds emphasize that their investments in young tech companies ahead of their initial public offerings are relatively small.
A Reuters analysis of fund filings and other data shows, though, that some have taken a more aggressive approach, boosting the share of these companies to more than 5% of assets and awarding them rich valuations that in some cases have helped them beat their benchmarks and peers by a wider margin.
Unicorns Come With Pointed Risks
Mutual funds' involvement also helped boost the number of so-called unicorns—private companies valued at $1 billion or more.
These private investments come at a risk, though. Many are young companies that have yet to make a profit. They are also harder to price and to sell than publicly traded stocks.
That could hurt investors in a downturn because fund managers forced to meet investor redemptions may have to sell liquid public companies while marking down the unlisted ones, says Larry Swedroe, director of research at Buckingham Asset Management in St. Louis and a regular columnist for ETF.com.
"Private companies typically trade at significant discounts for that reason," Swedroe said.
In a rising market, though, they help shore up performance. For example, bets on Uber Technologies and other unlisted companies helped the Hartford Growth Opportunities Fund deliver a 12.7% return in 12 months to Oct. 31 compared with a peer fund average of 5.2%, according to Lipper Inc.
How Pre-IPO Investments Outperform
The $4.5 billion fund cited Uber among top contributors to performance in its report for fiscal 2015, alongside Amazon and Netflix. The ride-services company's valuation in the fund surged 156% to $82.5 million, Hartford disclosures show.
Its pre-IPO stakes accounted for nearly 6% of net assets, while most of its peers have kept their exposure below 1%, fund holdings show. Hartford declined to comment.
Pre-IPO investments can amplify a fund's relative performance because they are not included in a comparison benchmark index, and some have far outpaced the stock market.
Fidelity Investments' valuation of Contrafund’s Series E stake in content-sharing company Pinterest has tripled to $480 million since an initial investment in October 2013, compared with the S&P 500’s 25% rise.
In a statement, Fidelity said such investments were “very small positions in the relatively few Fidelity funds that make such investments.”
Over the long term, the impact of those stakes on performance may be less significant in a fund as large as the $109 billion Contrafund than in some smaller peers.
Mutual fund investments, however, have measurable effect on companies' valuations. Those that received such financing last year saw their valuations more than double over their previous funding round. In contrast, valuations of companies that raised cash without mutual fund investors grew 1.5 times, according to PitchBook, a private equity, M&A and venture capital database....