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Why Did Pension Funds Buy Facebook?



September 05, 2012 – Comments (3) | RELATED TICKERS: FB

Board: Macro Economics

Author: yodaorange

By now I assume that everyone is aware of the Facebook IPO fiasco. The lawsuits are flying like Frisbees at the dog park, alleging all kinds of wrong doings. [1] There are also numerous investment banks that have already announced losses on the IPO. [2]

We do not invest in equity IPO’s for the widows and orphans accounts. We do occasionally invest in a new bond offering, but that is not the same as an IPO by a long shot. So I did not research or perform any due diligence on the Facebook IPO. My only thought was that statistically it might perform well over the short term, but I had a hard time imagining it doing well say over 5+ years.

It seems that several pension funds took positions in the IPO. So much for stodgy, old style investments in the SP 500 equities. I am sure the pension funds are under intense pressure due to low returns since ~ 2000. Three pension funds that bought Facebook IPO shares have joined a class action lawsuit alleging the underwriters led by Morgan Stanley gave favored investors an early warning about disappointing results that Facebook was yet to make public. (Yoda is shocked beyond belief that any Wall Street firm would do this. Surely it can NOT be true.)

From a Los Angeles Times story: [3]

"We expect Facebook and the people who benefited from that sale to pay up," said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO.

The Arkansas teacher pension fund is part of a group of institutional investors that includes the Fresno County Employees' Retirement Assn. (estimated Facebook losses: $1 million) and the North Carolina Retirement Systems (estimated losses: $12.4 million). The group has filed papers seeking to become lead plaintiffs in the case.

The California State Teachers’ Retirement System (CalSTRS) currently owns 1.2 million shares at a $17 million loss. What caught my attention was their strategy:

"As a patient, long-term investor with a 30-year investment horizon we believe that over time, the stock and the company should perform well," CalSTRS spokesman Michael Sicilia said in an email.

You expect non-METARites private investors to have irrational investment expectations. You would expect that large professionally managed pension fund investors like CalSTRS would have a more reasoned, statistically valid approach to investing. University of Florida professor, Jay Ritter, is one of the leading researchers on post IPO equity performance. His latest research on all US IPOS’ from 1980 through 2010 shows that IPO’s underperformed their benchmarks by 19.7% over the first three years. This is the total return including dividend reinvestment. [4]

The questions are:

1) Does CalSTRS really think that Facebook is a buy and hold for 30 years?

2) Why did CalSTRS and the other professionally managed pension funds ignore the historical IPO performance results?

Yoda does NOT have the answer to these questions. Yoda would be willing to short Facebook over the next 30 years. Yoda thinks the odds of market beating 30 year returns by Facebook are similar to the odds of being struck by lightning (1 in 1 million).

BOTTOM LINE is that IPO’s should be avoided by investors with a long term outlook.



[1]Morgan Stanley, Goldman Sachs, JP Morgan Chase sued over Facebook IPO

[2] Nasdaq agrees to reimburse Facebook brokers $62 million

[3] Los Angeles Times story on pension fund investments in Facebook

[4]Jay Ritter IPO results (Table 19, page 33 shows 1980-2010 data)

3 Comments – Post Your Own

#1) On September 05, 2012 at 2:55 PM, Parkite (< 20) wrote:

ah, another entity looking for a bailout.  whatever happened to taking responsibility for your actions?  and we are clearly talking about sophisticated investors here.  sigh.  just the way it is in america today.  fraught with moral hazard.

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#2) On September 05, 2012 at 7:32 PM, awallejr (35.12) wrote:

Well if they read all the blogs written here before it went public those managers wouldn't have bought the IPO.  I don't know what DD they did when they bought since too many red flags were flying.

1)  It was only a small percent that went public with a lock up period for much of the rest.  Come November who knows how many shares will be dumped.  I would never invest in these schemes where Wall Street just IPO's a small percent of a company.  It's a gimmick to force up prices on a short supply.  It also didn't work long term for the other reasons why a money manager shouldn't have invested as per 2) and 3).

2)  Zuckerberg retains complete control of the company.  If I am investing money in a company I want to have a say especially if it is a decent position.  So investors are completely at his mercy especially since he already stated he doesn't care about profits.  Yup that is what I want to hear from my investment's CEO.

3)  He is literally clueless on how to monetize what he has.  Kudos for building it but that is as far as his talent goes.  He is no Gates or Jobs.  Since he gets paid well and controls the company no pressure on him.

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#3) On September 06, 2012 at 9:48 AM, Option1307 (30.67) wrote:

Great post!

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