Early Facebook mutual fund buyers still in money

Reuters News

5/24/2012 12:36:52 PM - Reuters News

By Ross Kerber

(Reuters) - Fidelity Investments and other big mutual fund families that were early backers of Facebook Inc are likely still winners despite the social network's troubled stock market debut.

Facebook shares were priced at $38 per share in its initial public offering on Thursday. Despite an initial bump in their market debut on Friday, the shares fell on Monday, closing down 11 percent at $34.03. The decline prompted much hand-wringing among technology investors who had expected a bigger boost for the widely used social networking service.

But don't cry for the mutual funds, said John Bonnanzio, editor of the Fidelity Insight investor newsletter. Many funds bought Facebook shares last year, while the company was still private, on secondary markets for considerably less than $38, he said.

For example, about 24 Fidelity large-cap stock funds bought more than $200 million worth of Class B Facebook shares at between $25 to $35 from March to May of last year, Bonnanzio estimated. Class B shares have more voting rights than the Class A shares sold in Facebook's IPO, but convert into the same number of Class A shares when they are transferred.

T. Rowe Price Group of Baltimore and Morgan Stanley's asset management unit were also big buyers of Facebook shares before the company's long-awaited IPO, according to securities filings.

Most of the funds' holdings would still be above water despite Monday's decline, Bonnanzio said. That assumes the funds did not buy more shares in the IPO at $38.

Then again, funds could have bought more shares on Monday as the shares dipped. "If they are true believers, one would have to assume they are buying more" shares of Facebook today, Bonnanzio said.

Facebook accounts for just a tiny proportion of the portfolios of big mutual funds that bought shares of the company last year. Fidelity's well-known Contrafund, for instance, has total assets of $84.2 billion according to Morningstar. According to the fund's most recent filing, dated March 30, its Facebook holdings were worth $106.6 million - a mere 0.127 percent of the fund's total net assets at the time.

Fidelity spokeswoman Sophie Launay declined to comment.

T. Rowe Price held more than 18 million shares of Facebook as of March 31, according to a recent Facebook securities filing. Based on a share price of $35, T. Rowe's stake would be worth about $630 million.

T. Rowe Price spokeswoman Heather McDonold declined to comment.

Funds were able to buy Facebook shares on secondary markets, such as SharePost or Secondmarket, which arranged for Facebook employees to sell their personal shares before public trading began.

Chris Brown, chief investment officer for Pax World Funds in Portsmouth, New Hampshire, said that before the IPO, the firm was able to buy 420,000 shares of Facebook for two of its funds through Secondmarket in April, priced "in the low 30s."

Brown attributed the fall-off in Facebook's share price to a series of factors, including trading glitches in the market debut on Friday and the increase in the number of shares offered in the IPO.

"It was just a pile-on of not a lot of positive things," Brown said, adding he still has confidence in Facebook's long-term prospects.

The pre-IPO buying by funds also contributed to the share decline, he said, because it reduced the appetite for shares after the IPO. That kind of hunger for shares had provided a big boost to other hot technology companies in their market debuts, such as Google Inc.

"It's supply and demand," he said.

(Editing by Aaron Pressman and Leslie Adler)