Facebook Value Poses Questions for Mutual Funds

With Facebook’s impending I.P.O.filing many questions remain unanswered about the company. One that has everyone from mutual fund companies to investors scratching their heads, is how much are the company’s shares worth?

According to the investment-research firm Morningstar,more than 50 mutual funds own shares of Facebook. The company has received a valuation between $75 billion to $100 billion, the Wall Street Journal has reported while the numerous mutual funds have their varying estimates. This includes a $25 per share value by Fidelity Investments while T. Rowe Price Group comes in higher at $31.15. Other funds come in between these two figures.

Mutual funds are one of the few vehicles for investors to get in on pre-I.P.O companies. The amounts are small and pricing discrepancies can take place as mutual fund buyers will pay different prices for a piece of Facebook than its value, depending on which fund they invest in.

One example is the Morgan Stanley Focus Growth, which valued Facebook at $27 a share; investors could purchase the fund with Facebook in it at $33.63 a share.On the other hand, with the $31.15 T. Rowe Price Facebook valuation, investors would have paid $33.82 per share of the mutual fund, a 0.57 percent rise.

For investors looking to redeem funds, they would have received less from the Morgan Stanley fund than T. Rowe Price because of its higher valuation.

According to Doug Scheidt, the SEC’s associate director of investment management, the law allows fund companies some latitude in pricing private companies. This may be determined by price quotes from third-party brokers, including …

SharesPost or Second Market, or internal valuation models.

Closed-end Funds

Another arena for investors to get in on private companies are closed-end funds. This will also come with discrepancies as these trade differently.

According to Kevin Landis, portfolio manager of Firsthand Technology Value, private companies have become more attractive since the tech bubble as high-profile technology firms are going public later.

Landis’ fund has most of its portfolio in private investments such as Facebook and Yelp. This closed-end fund has a fixed number of shares and trades like a stock, as all products of this type do. Share prices will vary from the fund’s underlying assets value.

The Firsthand fund sells at about $17.25 a share, according to the Wall Street Journal, which the company has said represents a 30 percent discount from the underlying asset value. Since almost all of its investments are in private companies, investors won’t really know how much those assets are worth.

They have been told to be wary of these funds because values are difficult to determine.The companies do their best with different methodologies but like any investment, there’s always a risk.

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To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com