Mutual Funds Experiencing Losses Due To Investment In "Unicorns"
Mutual funds are suffering because of their large exposure to tech companies that have had disappointing initial public offerings.
Mutual funds are consistently trying to outperform benchmarks. One common strategy that mutual funds employ to do so is invest in so called “unicorns.” Unicorns are private companies valued at over $1 billion dollars. The idea is if they invest before an IPO, then mutual funds will benefit from the expected increased valuation once these unicorns go public.
“The managers hope to hit these home runs and so outperform some benchmark,” said Larry Swedroe, chief research officer of the Buckingham Family of Financial Services.
At one point, mutual funds owned $6.7 billion worth of private shares of widely known tech companies. Such companies include, We, Uber, Pinterest and Lyft. However, the IPOs and valuations of these companies have been disappointing. For example, We, the parent company of WeWork was privately valued by Fidelity Investments at $110 per share.
However, since that valuation, complications have arisen that will further delay the company’s IPO. Additionally, other mutual funds valued WeWork at a share price that was 67% lower than Fidelity’s valuation.
The Securities and Exchange Commission is working to better regulate the varied ways that mutual funds value private companies in order to allow for valuations with a wider consensus.