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Thursday, August 02, 2012

Funds Exit Early from Facebook

 Story first reported from

It wasn't supposed to end like this.

Fidelity Investments was an early buyer of Facebook Inc. shares. In the spring of 2011, two dozen of its funds bought more than $200 million worth of the company's private stock. Then, when Facebook went public in May, many of those funds and other Fidelity funds loaded up on publicly traded shares.

Now, many of the giant Boston-based company's fund managers are shrinking their stakes.

Twenty-one Fidelity funds sold more than 1.9 million public Facebook shares combined in June, with 16 of them selling more than a quarter of their stakes in the company, according to investment-research firm Morningstar Inc. Private shares can't be traded until later this year.

It is unclear whether the Fidelity funds made or lost money on the Facebook shares, but the stock has languished below its $38 offering price on May 18. In June, it traded between $25.52 and $33.45; shares hit an all-time low of $20.84 before closing at $20.88 on Wednesday.

The moves represent an about-face for Fidelity, one of the first institutional investors to take a significant stake in Facebook and the country's third-largest mutual-fund company by assets. Fidelity's funds owned the shares for at most six weeks—much shorter than the median holding period of about 22 months for U.S. stock funds, according to Morningstar.

To be sure, the sales represent a very small portion of the funds' holdings. Also, 13 Fidelity funds bought 2.2 million shares of Facebook in June, though more than 1.3 million of those went to index funds, which passively track established stock indexes.

Mutual-fund analysts say it is uncommon for mutual funds to flip shares so quickly.

Nearly two dozen Fidelity funds are dumping Facebook funds at a hurried clip, and they sold nearly two million shares in June alone.

A Fidelity spokeswoman said, "Our managers are not tied to a minimum holding period and need to be able to respond to changes in market conditions."

Facebook Chief Executive Mark Zuckerberg met with Fidelity executives, along with other large asset managers, during Facebook's IPO roadshow in May. Morgan Stanley and other underwriters of Facebook stock also called top institutional clients, including Fidelity, before the IPO to tell them their analysts had lowered Facebook's earnings and revenue estimates.

Fidelity wasn't the only company with funds that flipped Facebook shares. Turner Investment Partners' Large Growth fund, which has a typical holding period of about seven months, sold 28% of its shares within weeks of buying them. OppenheimerFunds Inc.'s Global Allocation fund in June sold more than 10,000 shares, or 10% of its holdings.

A fraction of mutual-fund companies, including Fidelity, report holdings on a monthly basis, while the majority report only quarterly. That means investors in most funds that sold shares in May and June won't ever know how much Facebook stock their funds once owned.

The biggest reported seller of shares in June was the Fidelity Puritan fund, a "balanced fund" that invests in both stocks and bonds. It sold more than 623,000 shares, or a quarter of its overall stake. Other big sellers included Fidelity Disciplined Equity, which invests in both growth and value stocks and sold more than 444,000 shares, or 47% of its stake, and Fidelity Dividend Growth, which sold more than 167,000 shares, or 25% of its stake. Fidelity Magellan, one of the best-known actively managed funds in the country, sold more than 155,000 shares, or 17% of its stake.

Fidelity Puritan has an average holding period of about eight months, according to Morningstar, and Fidelity Dividend Growth has an average holding period of a year and a half.

It is unusual for an IPO like Facebook to be sold so quickly by long-term fundamental investors. Typically, IPOs see growing ownership by such investors and shrinking ownership by trade-oriented hedge funds, according to a study completed last year by Ipreo, a capital-markets data and advisory firm.

In a study of 270 IPOs of U.S. companies between 2009 and 2011, institutions such as mutual funds and pension funds represented 45% of the IPOs' initial allocation. But one quarter later, they represented 67% of the shareholders in those same stocks.

This doesn't mean many mutual-fund managers won't try to cash in on a post-IPO pop, said University of Florida finance professor Jay Ritter, who studies IPOs. Such managers, many of whose companies pay millions in commissions to underwriters, expect to get shares of an IPO and try to flip the shares for a profit once they are widely traded, he said.

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