While in Mexico last week, I talked to a friend who said his wife bought shares of the Facebook (NYSE:FB) IPO — at about $42. She thought it was a can’t-miss investment opportunity. (Yep, Facebook is extremely popular in Mexico).
No doubt, she was just one of thousands of retail investors that took a big hit on the stock. But interestingly enough, there are many others who “bought” the stock — and didn’t even realize it. That’s because Facebook has been a popular holding for mutual funds.
The Wall Street Journal and Morningstar have put together an extensive analysis on this regarding the IPO. They crunched the numbers on about 160 mutual funds.
Of course, some of the most prominent buyers were the mega-operators like Morgan Stanley (NYSE:MS), Fidelity and Oppenheimer. Because of this, about 55% of the funds for 401(k)s have Facebook shares (based on the analysis from BrightScope).
But if you drill down into things, you’ll notice that some of the mutual funds were not the typical buyers of IPOs.
For example, the JPMorgan Intrepid Value (MUTF:JIVAX) owns shares in Facebook. But with a price-to-earnings ratio of 81, is FB really a “value” stock? That’s a stretch. Then there is the Fidelity Dividend Growth (MUTF:FDGFX), which also is a holder of Facebook shares. The company’s dividend payout? Zero.
All this points to the fact that lots of mutual funds have flexibility in their mandates. But with the case of Facebook — just like Apple (NASDAQ:AAPL), which even before announcing a dividend could be found in numerous dividend funds and other mismatches — it also shows that portfolio managers are desperate to find ways to boost returns.
But just like any other stock, there are no guaranteed riches in IPOs. And the risks can be substantial, as seen with the big drops in offerings from companies like Zynga (NASDAQ:ZNGA), Groupon (NASDAQ:GRPN) and Pandora (NYSE:P).
The stereotype is that retail investors chase overvalued shares. But with Facebook, it looks like even so-called investment professionals are wont to do the same.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.