Fund Giants’ Unicorn Dreams Gored - Adviser Investments

Fund Giants’ Unicorn Dreams Gored

If you’ve been reading financial news recently you couldn’t escape the tumultuous drama of office space-sharing company WeWork. In a matter of weeks the company filed for an IPO, withdrew it, fired its once-visionary CEO, nearly went bankrupt and was finally rescued by an emergency multi-billion-dollar bailout from its largest shareholder, SoftBank. While former CEO Adam Neumann bailed out via a $1.7-billion golden parachute, thousands of its employees are facing layoffs, and the company’s valuation tumbled from an expected $47 billion to just $8 billion—a drop of over 80%.

While WeWork’s ride has been exceptionally wild, it’s not the only private company whose huge multi-billion-dollar valuation took a hit once it faced public market scrutiny. Fellow “unicorns” like Uber and Lyft successfully launched IPOs earlier this year but have done poorly since, declining in value from their initial offering prices by around 35% to 45%, respectively.

Why should you care about this debacle? Usually mutual funds stick to investing in public stocks, so WeWork shouldn’t impact investors like us—right?

Wrong.

It’s true that the bulk of mutual funds holdings are publicly traded, but they have a bit of wiggle room to hold some “non-liquid” securities. Up to 15% of a fund’s holdings can be illiquid, according to SEC regulations. And in recent years, a number of funds, including some from Vanguard and Fidelity, have been taking advantage of that flexibility to own pieces of private companies. In the case of WeWork, Vanguard’s U.S. Growth has owned shares of the now-beleaguered company since 2014, while Fidelity’s Contrafund bought a stake in 2015.

The question is, what price do the fund giants put on those shares? With a public company, you know the price of the stock every single day. With private companies, mutual funds must generate their own valuation, and it may be months before investors learn that portfolio managers have soured on a company’s prospects. Fidelity, which valued its WeWork holdings at $411.5 million at the end of 2018, cut that number to $295 million this August and down to $193 million in September—before its recent implosion.

Before you get too worried, let us quickly add that WeWork is a tiny piece of each of these funds’ portfolios—less than one-half of one percent of U.S. Growth, and an even smaller portion of Contrafund’s portfolio—even at its loftiest valuation.

But a year ago, the media was lamenting that mutual funds (and hence, the average investor) couldn’t get in on these high-flying unicorn companies. Now it turns out that limiting how much a mutual fund can invest in private companies might not be such a bad idea.

About Adviser Investments

Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To.

Our minimum account size is $350,000.  To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.


Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. We do not provide legal or tax advice, nor sell insurance products. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Always consult an attorney or tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

© 2019 Adviser Investments, LLC. All Rights Reserved.