For Facebook Inc (NASDAQ:FB)’s lead underwriter in its initial public offering, Morgan Stanley (NYSE:MS), new data shows that the firm’s eight of nine U.S. mutual funds had an unusually high proportion of its total assets invested in the company.
This has now left the fund shareholders highly exposed to the stock’s continuous decline since the May IPO, reported the Wall Street Journal.
Philip Carret was an investor and founder of Pioneer Fund, one of the first mutual funds in the United States. Carret ran the mutual fund for 55 years, during which time an investment of $10,000 became $8 million. That suggests he achieved a compound annual return of nearly 13% for his investors. Q1 2021 hedge Read More
The Morgan Stanley funds in question received Facebook shares prior to the IPO, at prices lower than the $38 offering price. On the plus side, these shareholders may now have paper gains, but they are unable to sell their holdings.
Last month, here at ValueWalk, we disclosed the high proportion of Morgan Stanley mutual funds invested in Facebook Inc (NASDAQ:FB). We also said it was a friendly reminder of buyer beware, and questioned whether the firm was looking out more for its own interests than its customers. What is surprising about this, is that we used the exact data which the Wall Street Journal had used for their previous article on a related topic!
While shareholders may be burned from the investment, it hasn’t been so bad for Morgan Stanley (NYSE:MS).
For the firm, its role as its lead underwriter was vital to securing orders as the social media giant went public. It also counseled Facebook’s senior executive to raise the IPO’s size and price, amid concerns about the outlook for profits. From this, Morgan Stanley grabbed $200 million from underwriting fees and trading profits, as noted in regulatory filings.
But this isn’t the first time Morgan Stanley’s mutual funds have take large holdings in big technology companies. The Wall Street Journal cites Apple Inc. (NASDAQ:AAPL), Amazon.com Inc. (NASDAQ:AMZN), and LinkedIn Corp. (NASDAQ:LNKD) as previous bets.
Fortunately these values have risen in 2012.
The question in the Facebook Inc (NASDAQ:FB) case, is whether Morgan Stanley’s role as the lead underwriter affected investment decisions.
Regardless of this transaction, large investment banks that simultaneously buy and sell shares in any company sit “in this conflicted position,” according to Frank Partnoy, a University of San Diego law professor. He is an alumni of the firm, and added via the Wall Street Journal, “This time it didn’t work out.”
Has anything been done illegally with the funds?
It doesn’t appear the firm violated Securities and Exchange Commission (SEC) rules that limit investments from offerings underwritten by an affiliate. Furthermore, SEC rules enable bank-affiliated mutual funds as offering paticipants, when its bank’s investment bankers advise the company, but the fund managers can’t purchase more than 25 percent in the deal, and then subsequently purchase shares from another bank.
What’s notable about the Facebook Inc (NASDAQ:FB) investment is that Morgan Stanley’s fund holdings are glaring, as compared to funds managed by the social media company’s other institutional holders. This includes (by dollar value) Fidelity Investments, T. Rowe Price Group, Inc. (NASDAQ:TROW), and Goldman Sachs Asset Management, a unit of underwriter Goldman Sachs Group, Inc.(NYSE:GS).
Take a look per the Wall Street Journal.
According to Morgan Stanley Focus Growth Portfolio had 5.7 percent of its assets in Facebook shares as of July 31. There was Morgan Stanley Institutional Opportunity Portfolio with 5.5 percent and Morgan Stanley Institutional Growth Portfolio at 4.8 percent. In eight other Morgan Stanley mutual funds, holdings sat between 3.6 percent and 4.6 percent, with proportions between 5 percent and 7.8 percent on June 30.
Jay Ritter, a University of Florida finance professor said, “It’s surprising that so many Morgan Stanley affiliated funds, out of the thousands of mutual funds show up as having extremely big weights.”
But yet it’s not illegal.
SEC rules state that mutual fund managers have a fiduciary duty to watch out for investors’ interests before their own. However, in this case, there is not a sign that Morgan Stanley’s fund managers either purchased Facebook shares due to its underwriting relationship, or attempted to gain favor with Facebook executives.
Does this remain to be determined?