Funds Play Venture Capital's Role: Invest Rapidly in Silicon Valley

Zacks

Four mutual fund firms – BlackRock, Fidelity Investments, Janus Capital Group and T. Rowe Price Group – are reportedly have become active players in backing the Silicon Valley startups. Mutual fund firms are increasingly betting money in the startups, particularly in the Silicon Valley. The list includes prominent startups like Airbnb Inc., Dropbox Inc. and Pinterest Inc.
In a recent move, Uber Technologies raised $1.2 billion at a valuation of $18.2 billion. According to VentureSource data, Uber Technologies accumulated the second-biggest private valuation after Facebook’s $50 billion. Fidelity, Wellington Management and BlackRock are reported to have pumped in $425 million, $209 million and $175 million, respectively.

Funding Number Shoots Up

According to venture-capital tracking firm CB Insights, the four major mutual-fund firms, BlackRock, Fidelity Investments, Janus Capital Group and T. Rowe Price Group, have put in money in 16 private funding deals last year. The number is up from 9 in 2012 and 6 in 2011.

The rush, or the record pace of investing in startups, is thus evident. This year, they have already closed 13 deals successfully, injecting about $9 billion into the private tech deals.

How the Funds Benefit

The startups promise aggressive growth to the funds. Looking at Uber, company CEO Travis Kalanick commented that this American venture-funded startup is witnessing doubling of revenues every two quarters. The CEO also said that early investors have seen up to 2000 times paper return since Uber started operating four years back.
Evidently, the benefit is solely the return that these startups promise to provide.

T. Rowe Price Group Inc and Morgan Stanley were the early investors in Twitter. At June end last year,

T. Rowe Price New Horizons Fund (PRNHX) was reported to have 4.6 million Twitter shares, each of them priced at $2.66. US regulatory filings showed that Morgan Stanley Institutional Small Company Growth Fund had paid $2.67 for each of 2.26 million Series E preferred shares that translate into Twitter common stock. On debut, Twitter’s shares soared to $50.09 before settling at $44.90.

Morningstar data had confirmed T. Rowe to be the largest Twitter’s pre-IPO investor. Kennard Allen, manager of T. Rowe Price Science & Technology Fund (PRSCX), believes in covering more ground to tap opportunities. The manager also reportedly had been a pre-IPO investor in Facebook and Groupon. Facebook’s IPO had eventually turned out to be the biggest one in technology while media experts termed it to be a “cultural touchstone”.

Fidelity on the other hand was reported to have accumulated 2.4 million Twitter shares after its IPO. Fidelity Contrafund (FCNTX) held 1.1 million shares at the end of November, adding to its portfolio that already boasted $1.6 billion worth of stake in Facebook at November end. According to Fidelity and Lipper, 30 Fidelity funds owned Twitter shares.

What for Investors?

Mutual funds have thus become a way of investing in startups or in private companies that are planning to go public. The funds offer a platform for investors to get outsize gains that were traditionally enjoyed by venture capitals. Investors’ wealth is also secured in the form of diversification of the fund’s asset. Any mutual fund allocated money in a basket of stocks, thus minimizing the chances of incurring loss due to failure of a startup or an IPO. The funds get to buy shares at a lesser value than the public offering prices. Successful IPO or aggressive growth of a company will ultimately lead to better returns for investors.

Mutual Fund Recommendations
There are not many comments from fund families specifying funds that park their money in these companies. However, we will suggest what investors can do with the funds mentioned above, i.e., T. Rowe Price New Horizons Fund, T. Rowe Price Science & Technology Fund and Fidelity Contrafund.
The key is to look at the Zacks Rank the funds carry. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performances, but the likely future success of the fund.

Fund to Buy

T. Rowe Price New Horizons Fund invests in diversified small and emerging growth companies. These companies are usually at their initial stage of corporate life cycle and have not yet been recognized by the investment communities. The companies have the potential to see increasing earnings growth based on product launches, management or economic structural changes.

The fund carries a Zacks Mutual Fund Rank #2 (Buy). The fund has provided 24.9%, 20.9% and 25.2% over the last one, three and five years, respectively. The fund has an expense ratio of 0.80% as compared to category average of 1.39%.
Top holdings of the fund include Restoration Hardware Holdings Inc (RH), O'Reilly Automotive Inc (ORLY), Harman International Industries, Incorporated (HAR) and Twitter.

Fund to Hold

T. Rowe Price Science & Technology Fund seeks capital growth over the long term. The fund invests a lion’s share of its assets in companies that may be potential gainers from science and technology development. The fund usually invests in US companies, but may also invest in non-US stocks.
The fund carries a Zacks Mutual Fund Rank #3 (Hold). The fund has provided 32.1%, 14.3% and 17.9% over the last one, three and five years, respectively. The fund has an expense ratio of 0.86% as compared to category average of 1.50%.
Top holdings of the fund include Google Inc (GOOGL), Red Hat Inc (RHT), Amazon.com, Inc. (AMZN) and Cisco Systems, Inc. (CSCO).

Fund to Sell

Fidelity Contrafund fund usually invests in 'growth' stocks, 'value' stocks, or both. The fund invests in foreign and domestic issuers. The types of companies in which the fund may invest include companies experiencing positive fundamental change such as a new management team or product launch or companies that are undervalued in relation to securities of other companies in the same industry. . This fund invests primarily in the common stock of companies whose value the management believes is not fully recognized by investors.
The fund carries a Zacks Mutual Fund Rank #4 (Sell). The fund has provided 22.0%, 17.0% and 17.6% over the last one, three and five years, respectively. The fund has an expense ratio of 0.66% as compared to category average of 1.21%.
Top holdings of the fund include Berkshire Hathaway Inc. (BRK.A), Google Inc Class A, Google Inc Class C (GOOG), and Wells Fargo & Co (WFC).

About Zacks Mutual Fund Rank

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