It used to be that a unicorn was a mythological animal resembling a horse but with a pointed horn sticking out of its forehead. In 2013, seed-stage investor Aileen Lee coined the phrase “Unicorn Club” in a study Cowboy Ventures did on large startup exits. The term stuck. Today, it’s a big part of the venture capital lexicon.
TechCrunch magazine says there are 193 private companies around the world with post-money valuations of $1 billion or more, with Uber being the highest at $62.5 billion and a staggering average valuation of $3.7 billion. Unicorn valuations are growing so rapidly that actively managed mutual funds can’t resist getting on board.
It’s a trend that’s growing despite concerns mutual funds shouldn’t be investing in private companies due to their inherent lack of liquidity that could force fund managers to sell stocks in a downturn to meet redemptions, while simultaneously having to mark down private company holdings. It’s a double whammy that risk-averse investors are best to avoid.
However, mutual funds with investments such as Uber and Pinterest in their holdings have been able to deliver some market-beating returns because of those bets, so investors can expect more mutual funds to get on the pre-IPO bandwagon.
For those who see the benefit of owning an actively managed portfolio that expands its horizons beyond public companies, these three mutual funds could be exactly what the doctor ordered.
Best Mutual Funds to Ride Unicorn Wave: Hartford Growth Opportunities Fund Class A (HGOAX)
Expense Ratio: 1.12%, or $112 per $10,000 invested
If you like your portfolio managers to come with lots of professional experience, the trio that manages the $4.3 billion Hartford Growth Opportunities Fund Class A (MUTF:HGOAX) fund should do the trick averaging 23 years between them.
When it comes to private investments, the fund held 25 at the end of April 2016, totaling $387 million in value and representing 8.5% of the $4.3 billion in total net assets.
Of the 25 investments, its largest is Uber at $35 million followed closely by Tory Burch LLC at $32 million. In terms of unicorns, 12 of the 25 holdings are valued at $1 billion or more. Uber is such a big position within the portfolio that it is the fifth largest holding at a weight of 2.61%.
In terms of performance, it has done well over the long-term, generating a 10-year annualized total return of 9.09%, more than 100 basis points better than the S&P 500 and large-cap growth funds. Even better, it’s up 3.6% year-to-date through Aug. 22 and hasn’t had a negative return in a calendar year since 2011.
While it’s hard to know for certain, it’s highly likely that HGOAX is the mutual fund with the largest amount of non-listed securities as a percentage of its total net assets. If you want in on the pre-IPO action, this might be the fund for you.
Its net expense ratio is 1.12%, slightly less than the category average of 1.17%.
Best Mutual Funds to Ride Unicorn Wave: Fidelity Blue Chip Growth Fund (FBGRX)
Expense Ratio: 0.89%
As of the end of July, the Fidelity Blue Chip Growth Fund (MUTF:FBGRX) had total net assets of $19.4 billion with $14.2 billion invested in FBGRX itself. With a reasonably low turnover rate of 51%, the 30-year-old fund has done nicely for investors over the long-term.
FBGRX holds positions in 33 private companies for a total of $479 million or 2.5% of the entire portfolio. The biggest holding by far is Uber at $271 million or 57% of its total private company holdings. Fidelity picked up the Uber investment in 2014 for $94 million, which translates into a paper profit of $177 million and a 188% return on investment over 24 months.
Of the unicorns, FBGRX is invested in 13 of them with Uber, as mentioned, being the biggest with a company called Mulberry Health, a health and accident insurance provider, the next biggest at $18.4 million.
From a performance standpoint, this fund gets four stars from Morningstar. Over the last 10 years, it has delivered an annualized total return of 9.9%, more than 90 basis points better than Hartford’s Growth Opportunities Fund.
If you like low fees you can’t go wrong with FBGRX whose net expense ratio is 0.89%, 28 basis points lower than the large-cap growth category.
Best Mutual Funds to Ride Unicorn Wave: Fidelity Contrafund Fund (FCNTX)
Expense Ratio: 0.71%
If you like your mutual funds humongous, then the 50-year-old Fidelity Contrafund Fund (MUTF:FCNTX) is just the ticket. The fund itself had $109.3 billion in net assets as of the end of July with FCNTX responsible for 72% of the total.
FCNTX holds positions in 22 private companies for a total of $1.7 billion. However, because it’s such an enormous fund, the almost-$2-billion in private company investments translates into just 1.6% of the entire portfolio.
Uber is the second-largest holding at $237 million, with Pinterest being the largest with more than double the amount at $536 million or 32% of its total private company holdings. Fidelity picked up Pinterest at various stages between 2013 and 2014 for a total of $200 million, which translates into a paper profit of $336 million and a 168% return on investment over 36 months.
Of the unicorns, FCNTX is invested in 13, with Pinterest and Uber representing the lion’s share of investment.
From a performance standpoint, this fund gets four stars from Morningstar as well as a silver rating, which is even better than the four stars because it represents Morningstar’s view on the future rather than the past. Over the last 10 years, it has delivered an annualized total return of 8.8%, which isn’t as good as either HGOAX or FBGRX. However, in the down years of 2008 and 2011, FCNTX didn’t lose as much as the other two.
With the lowest turnover rate of all three mutual funds at 0.45% and a net expense ratio also lower at 0.71%, there’s no reason to fear this fund.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.