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Morgan Stanley Bets Big on Facebook
Among the many mutual funds that bet on Facebook and have only losses to show for it, the pain has been especially acute at Morgan Stanley. Telis Demos reports on The News Hub.Video - Morgan Stanley Has Mutual Funds With Heavy Investments in Facebook - WSJ.com
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Morgan Stanley Funds in Big Facebook Bet
By Aaron Lucchetti and Telis Demos8/24/2012 11:57:00 AM
U.S. mutual funds run by Morgan Stanley(MS), the lead underwriter in Facebook(FB) Inc.'s $16 billion initial public offering, have disproportionately high investments in the social-media company, leaving fund shareholders exposed to the stock's big drop since its May 18 IPO.
Among the many mutual funds that bet on Facebook and have only losses to show for it, the pain has been especially acute at Morgan Stanley. Telis Demos reports on The News Hub.
New data show that eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley's asset-management arm, according to fund tracker Morningstar Inc.
Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.
The Morgan Stanley funds that have Facebook shares got many of them before the IPO at prices well below the $38 offering price.
That means that fund shareholders may still have paper gains on their Facebook purchases, depending on when the fund bought their original stake. It also means the funds have been unable to sell any of their pre-IPO holdings.
The company's mutual funds have made large bets on other big-name technology companies in recent years, including bets on Apple(AAPL) Inc., Amazon.com(AMZN) Inc. and LinkedIn(LNKD) Corp. whose values have all surged this year.
The Funds That Own Facebook
Hundreds of mutual funds have stakes in the social media company. See a list and sort by percentage of fund assets devoted to Facebook, and by absolute and relative performance.
Still, the Morgan Stanley funds' large stakes raise questions about whether the firm's role as lead underwriter influenced decisions.
A large investment bank that simultaneously buys and sells shares in any company "is in this conflicted position," said Frank Partnoy, a law professor at the University of San Diego who worked for Morgan Stanley in the 1990s. "This time it didn't work out."
The funds span the $1.6 billion Focus Growth fund to the $2.5 million Institutional Global Advantage fund.
Morgan Stanley's funds don't appear to have violated Securities and Exchange Commission rules limiting investments in offerings underwritten by an affiliate. SEC rules allow bank-affiliated mutual funds to participate in offerings in which the bank's investment bankers are advising the company, as long as the fund managers don't buy more than 25% of the deal and they buy the shares from a different bank.
The concentration of Morgan Stanley's funds stands out when compared with funds operated by other large institutional holders of Facebook stock.
Morgan Stanley Focus Growth Portfolio had 5.7% of its assets in Facebook shares as of July 31, according to Morgan Stanley's website, while Morgan Stanley Institutional Opportunity Portfolio had 5.5% and Morgan Stanley Institutional Growth Portfolio had 4.8%. Others among the eight Morgan Stanley mutual funds range between 3.6% and 4.6%. Those proportions ranged between 5% and 7.8% on June 30, according to the most recent Morningstar data that included other fund families.
"It's surprising that so many Morgan Stanley affiliated funds out of the thousands of mutual funds show up as having extremely big weights," said Jay Ritter, a professor of finance at the University Florida.
Morgan Stanley isn't the largest institutional holder of Facebook.
Larger holders by dollar value include Fidelity Investments, T. Rowe Price Group Inc. and Goldman Sachs Asset Management, a unit of underwriter Goldman Sachs Group Inc. Goldman also owned Facebook shares before its IPO.
Goldman's most concentrated mutual fund position in Facebook was the Technology Tollkeeper fund, with Facebook making up 2.85% of its portfolio as of the end of June.
No mutual funds operated by Fidelity or T. Rowe Price, two other large institutional holders, publicly reported holding more than 1% of their portfolios in Facebook through June.
Many of the Morgan Stanley funds are sold to institutions only, and require a $5 million minimum investment.
Morgan Stanley Multicap Growth Fund—one fund open to retail investors, including Morgan Stanley Smith Barney brokers—had a stake in Facebook as early as November 2010, when Facebook shares were valued at about $13. They closed Thursday at $19.44, down 49% since the IPO.
In June, a commentary on Morgan Stanley's fund website noted that Facebook and other technology stocks were "the leading detractor in the portfolio this quarter," attributing the decline in Facebook shares "to post-IPO volatility."
Under SEC rules, mutual fund managers also are bound by fiduciary duties to look out for their investors' interests over their own.
Read More
Nasdaq's Facebook Plan Under Fire
There's no sign that fund managers at Morgan Stanley bought Facebook shares because of the firm's underwriting relationship with Facebook, or to help curry favor with Facebook executives who chose Morgan Stanley for a key underwriting assignment in the spring IPO.
Mr. Ritter cited "psychological factors" as a possible explanation for the large investments, driven by the fact that many of the funds owned a big chunk of Facebook shares before the company sold shares to the public.
"There's a tendency to fall in love with what you've got rather than stepping back," said Mr. Ritter. Many Morgan Stanley funds added to their pre-public stakes during the month of the IPO—a sign, he said, that "they were drinking the Kool-Aid and became true believers."
Morgan Stanley has streamlined its mutual fund business under Gregory Fleming, who runs both the firm's asset management and wealth management units. Morgan Stanley's asset management at the end of June managed $311 billion and produced $456 million in revenues.
Morgan Stanley funds with the strongest liking for Facebook are overseen by Dennis Lynch, the firm's head of growth investing. A Morgan Stanley spokesman declined to comment on behalf of Mr. Lynch.
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com and Telis Demos at Telis.Demos@wsj.com
Among the many mutual funds that bet on Facebook and have only losses to show for it, the pain has been especially acute at Morgan Stanley. Telis Demos reports on The News Hub.
New data show that eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley's asset-management arm, according to fund tracker Morningstar Inc.
Morgan Stanley had a crucial role in lining up orders for Facebook as the social-media company prepared to go public. It helped advise Facebook executives to increase the size and price of the IPO, despite warnings the company was making about its profit outlook. The New York securities firm, which declined to comment, took in $200 million in underwriting fees and trading profits, according to regulatory filings and people involved in the deal.
The Morgan Stanley funds that have Facebook shares got many of them before the IPO at prices well below the $38 offering price.
That means that fund shareholders may still have paper gains on their Facebook purchases, depending on when the fund bought their original stake. It also means the funds have been unable to sell any of their pre-IPO holdings.
The company's mutual funds have made large bets on other big-name technology companies in recent years, including bets on Apple(AAPL) Inc., Amazon.com(AMZN) Inc. and LinkedIn(LNKD) Corp. whose values have all surged this year.
The Funds That Own Facebook
Hundreds of mutual funds have stakes in the social media company. See a list and sort by percentage of fund assets devoted to Facebook, and by absolute and relative performance.
Still, the Morgan Stanley funds' large stakes raise questions about whether the firm's role as lead underwriter influenced decisions.
A large investment bank that simultaneously buys and sells shares in any company "is in this conflicted position," said Frank Partnoy, a law professor at the University of San Diego who worked for Morgan Stanley in the 1990s. "This time it didn't work out."
The funds span the $1.6 billion Focus Growth fund to the $2.5 million Institutional Global Advantage fund.
Morgan Stanley's funds don't appear to have violated Securities and Exchange Commission rules limiting investments in offerings underwritten by an affiliate. SEC rules allow bank-affiliated mutual funds to participate in offerings in which the bank's investment bankers are advising the company, as long as the fund managers don't buy more than 25% of the deal and they buy the shares from a different bank.
The concentration of Morgan Stanley's funds stands out when compared with funds operated by other large institutional holders of Facebook stock.
Morgan Stanley Focus Growth Portfolio had 5.7% of its assets in Facebook shares as of July 31, according to Morgan Stanley's website, while Morgan Stanley Institutional Opportunity Portfolio had 5.5% and Morgan Stanley Institutional Growth Portfolio had 4.8%. Others among the eight Morgan Stanley mutual funds range between 3.6% and 4.6%. Those proportions ranged between 5% and 7.8% on June 30, according to the most recent Morningstar data that included other fund families.
"It's surprising that so many Morgan Stanley affiliated funds out of the thousands of mutual funds show up as having extremely big weights," said Jay Ritter, a professor of finance at the University Florida.
Morgan Stanley isn't the largest institutional holder of Facebook.
Larger holders by dollar value include Fidelity Investments, T. Rowe Price Group Inc. and Goldman Sachs Asset Management, a unit of underwriter Goldman Sachs Group Inc. Goldman also owned Facebook shares before its IPO.
Goldman's most concentrated mutual fund position in Facebook was the Technology Tollkeeper fund, with Facebook making up 2.85% of its portfolio as of the end of June.
No mutual funds operated by Fidelity or T. Rowe Price, two other large institutional holders, publicly reported holding more than 1% of their portfolios in Facebook through June.
Many of the Morgan Stanley funds are sold to institutions only, and require a $5 million minimum investment.
Morgan Stanley Multicap Growth Fund—one fund open to retail investors, including Morgan Stanley Smith Barney brokers—had a stake in Facebook as early as November 2010, when Facebook shares were valued at about $13. They closed Thursday at $19.44, down 49% since the IPO.
In June, a commentary on Morgan Stanley's fund website noted that Facebook and other technology stocks were "the leading detractor in the portfolio this quarter," attributing the decline in Facebook shares "to post-IPO volatility."
Under SEC rules, mutual fund managers also are bound by fiduciary duties to look out for their investors' interests over their own.
Read More
Nasdaq's Facebook Plan Under Fire
There's no sign that fund managers at Morgan Stanley bought Facebook shares because of the firm's underwriting relationship with Facebook, or to help curry favor with Facebook executives who chose Morgan Stanley for a key underwriting assignment in the spring IPO.
Mr. Ritter cited "psychological factors" as a possible explanation for the large investments, driven by the fact that many of the funds owned a big chunk of Facebook shares before the company sold shares to the public.
"There's a tendency to fall in love with what you've got rather than stepping back," said Mr. Ritter. Many Morgan Stanley funds added to their pre-public stakes during the month of the IPO—a sign, he said, that "they were drinking the Kool-Aid and became true believers."
Morgan Stanley has streamlined its mutual fund business under Gregory Fleming, who runs both the firm's asset management and wealth management units. Morgan Stanley's asset management at the end of June managed $311 billion and produced $456 million in revenues.
Morgan Stanley funds with the strongest liking for Facebook are overseen by Dennis Lynch, the firm's head of growth investing. A Morgan Stanley spokesman declined to comment on behalf of Mr. Lynch.
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com and Telis Demos at Telis.Demos@wsj.com
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