Do You Know What Your Mutual Fund Owns..And What it is Really Worth ?

The NYT reports on the growing number of mutual funds that own stakes in non public tech statrt ups. 

The retirement accounts of millions of Americans have long contained shares of stalwart companies like General Electric, Ford and Coca-Cola. Today, they are likely to include riskier private stocks from Silicon Valley start-ups like Uber, Airbnb and Pinterest.

Big money managers including Fidelity Investments, T. Rowe Price and BlackRock have all struck deals worth billions of dollars to acquire shares of these private companies that are then pooled into mutual funds that go into the 401(k)’s and individual retirement accounts of many Americans. With private tech companies growing faster than companies on the stock market, the money managers are aiming to get a piece of the action.

Fidelity’s Contrafund includes $204 million in Pinterest shares, $162 million in Uber shares, and $24 million in Airbnb shares. Over all, there were 29 deals last year in which a mutual fund bought into a private company, and they were worth a collective $4.7 billion, according to CB Insights. That was up from six such deals, worth a combined $296 million, in 2012. T. Rowe Price was the most active

These non public companies are illiquid, difficult to value and the investor can actually only realize profits when the company goes public. In other words, at least parts of major mutual funds have left the world of publicly traded stocks into the far different investment marketplace of venture capital. I doubt too many investors are aware of the difference.

 Since these start up companies are not public the requirements for publicly available financial disclosures don’t exist. And based on the type of measures used in the public equity markets the valuations are astronomical, This means any disappointments in performance of the business or surprises in any of the financial metrics could lead to a large rapid decline in value. And of course even those valuations are based only on the data voluntarily provided by the company. For example Uber owned by these funds has encountered regulatory issues and other controversies in various part of the world. 

As a group small cap growth publicly traded stocks(growth meaning high p/e or other valuation measure) are the worst performing category of the stocks.  They are often referred to as “lottery tickers”..since a few wind up generating high returns but many many more disappoint.

A strong case could be made that these non public small companies with high valuation are even riskier.

Barrons gives some more specific information about this trend  here   

 As of the Boston fund(Fidelity) giant’s latest filing, its $113 billion Fidelity Contrafund (ticker: FCNTX) alone owned $162 million worth of Uber and $142 million of file-hosting company Dropbox. T. Rowe Price Group (TROW) had about a dozen funds on the list, including the $46 billion T. Rowe Price Growth Stockfund (PRGFX), which recently had a $63 million stake in rental marketplace Airbnb and $74 million in Dropbox. Rounding out the list were funds from BlackRock (BLK), Franklin Resources (BEN), and Vanguard Group, among others.

I looked at the information on the Fidelity and T Rowe Price websites at information on the funds losted above. 

The following appears for the contrafund on the Fidelity website

Strategy

Investing in securities of companies whose value FMR believes is not fully recognized by the public. Investing in either 'growth' stocks or 'value' stocks or both. Normally investing primarily in common stocks.

The TROWE Price Growth Stock fund has the following on the TROWE website hard to see how Dropbox and Airbnb match this description::

This fund provides long-term capital appreciation potential by focusing on established growth companies with proven performance records. These companies are typically financially sound and represent a wide variety of industries. To enhance return potential, the fund also has the ability to invest in foreign companies.

Bottom line: 

Unless you check carefully your mutual fund may own types of securities you didn’t expect it to hold.

And since some of the securities you fund may own are not traded securities with open market prices you may not really know what your fund shares are worth.