Face­book chaos: should you still be in­vested?

The Daily Telegraph - Your Money - - FRONT PAGE -

Scan­dal-hit Face­book has lost 11pc of its mar­ket value in a month, leav­ing some pro­fes­sional in­vestors who had pre­vi­ously backed the stock wa­ver­ing in their sup­port. The so­cial me­dia gi­ant has been em­broiled in con­tro­versy since it was re­vealed that 87 mil­lion peo­ple had their per­sonal data har­vested by po­lit­i­cal con­sult­ing firm Cam­bridge An­a­lyt­ica with­out their knowl­edge.

Face­book ap­pli­ca­tions, such as quizzes and games, were able to har­vest data from all of a user’s friends’ pro­files, even if the friends them­selves had not used the app.

This has sparked an in­ves­ti­ga­tion by Amer­i­can reg­u­la­tors, and chief ex­ec­u­tive Mark Zucker­berg this week tes­ti­fied be­fore Congress.

A large num­ber of in­vestors will, whether they know it or not, be ex­posed to Face­book. This could be through di­rectly hold­ing the share, or hold­ing it via a fund that is in­vested.

Ac­cord­ing to data from re­search firm FE An­a­lyt­ics, 33 out of 296 global funds have Face­book as a top 10 hold­ing, as do 38 out of 138 funds in the North Amer­ica sec­tor.

Many fund man­agers still back the stock to suc­ceed. Terry Smith, who runs the £12bn Fund­smith Eq­uity fund, re­cently added Face­book as a new top 10 hold­ing in his fund.

So, should those who own the stock be sell­ing? Tele­graph Money spoke to top fund man­agers with op­pos­ing views.

The so­cial net­work’s fu­ture is di­vid­ing in­vestors, re­ports James Con­ning­ton

Face­book used to be a top 10 hold­ing of James Thom­son’s £1.2bn Rath­bone Global Op­por­tu­ni­ties fund. The fund has de­liv­ered a 493pc re­turn, com­pared with 280pc for the FTSE World in­dex, dur­ing Mr Thom­son’s 15 years in charge.

He first bought Face­book shares in 2013, but sold the en­tire hold­ing a few weeks ago – the largest ever sale in the fund’s his­tory.

Mr Thom­son said: “We feel the bom­bard­ment of ad­ver­tis­ing and ex­ploita­tion of per­sonal data are pol­lut­ing the ap­peal of Face­book. In its pur­suit of profit, Face­book is los­ing its con­sumer trust.”

He ex­plained that there are two main po­ten­tial trig­gers that could lead the stock “to crater”.

The first is cus­tomer fa­tigue; the re­cent con­tro­versy could cause users to spend less time on the so­cial me­dia ser­vice and en­gage less, hurt­ing earn­ings.

The sec­ond is ad­ver­tis­ers start­ing to ques­tion the in­tegrity of Face­book’s ad­ver­tis­ing re­port­ing data.

A more fun­da­men­tal prob­lem, how­ever, is that Face­book “can’t re­build trust with users and pro­tect prof­its for share­hold­ers at the same time”, ac­cord­ing to Mr Thom­son. In other words, the changes that may need to be made to its ser­vice to re­gain user trust could hurt earn­ings.

“We could be wrong – op­ti­mists say In­sta­gram, which Face­book owns, will pick up the slack, but it makes less money per user than Face­book,” he said.

Mr Thom­son doesn’t be­lieve that Mr Zucker­berg’s re­cent tes­ti­mony be­fore Congress will do much to calm the pres­sure on the firm, “given his re­sponses so far have come across as ro­botic, repet­i­tive, and un­sym­pa­thetic”.

He added: “The real fire­works could be in two weeks, when Face­book re­ports its quar­terly re­sults. If so­cial me­dia com­pa­nies push too hard on ad­ver­tis­ing, or mak­ing money out of their users, they get turned off.”

Axa Fram­ling­ton Global Tech­nol­ogy has de­liv­ered a 398pc re­turn over the past 10 years, com­pared with 310pc for the MSCI World In­for­ma­tion Tech­nol­ogy in­dex, which con­sists of 170 tech­nol­ogy com­pa­nies spread across 23 de­vel­oped mar­kets.

Man­ager Jeremy Glee­son has been in charge since 2007, and has more than 7pc of the fund in­vested in Face­book shares.

His view is that although the past few weeks “have been dif­fi­cult” for Face­book, “the medium term trends sup­port­ing the in­vest­ment case for Face­book re­main in­tact”.

He added: “The re­cent share price fall has been driven by the an­tic­i­pa­tion of a risk that neg­a­tive head­lines may re­sult in large num­bers of users clos­ing their ac­counts. We think this is un­likely, and back the man­age­ment team to re­solve the is­sue.”

Mr Glee­son ex­plained that Face­book has taken ac­tion against Cam­bridge An­a­lyt­ica, is in­ves­ti­gat­ing fur­ther, and that Mr Zucker­berg’s tes­ti­mony should pro­vide greater un­der­stand­ing of how the firm will pre­vent sim­i­lar prob­lems in the fu­ture.

“We don’t think ad­ver­tis­ers will make dra­matic changes for the mo­ment, as there are not many ef­fi­cient al­ter­na­tives that com­bine a per­son­alised so­lu­tion and a huge user base,” Mr Glee­son said.

He added: “The re­cent is­sue may over­hang the com­pany for a cou­ple of quar­ters un­til we see what sort of im­pact (if any) it is hav­ing on its fi­nan­cial re­sults. If the com­pany is fined, we be­lieve Face­book has enough cash to with­stand the hit.”

Un­like many com­men­ta­tors, he does not be­lieve tech­nol­ogy stocks are in a bub­ble.

“Tech­nol­ogy stocks have per­formed well, but this has been sup­ported by strong earn­ings and cash flow growth,” he said.

Nick Evans, man­ager of Po­lar Cap­i­tal’s £1.5bn Global Tech­nol­ogy fund, also con­tin­ues to back the stock – it is one of the fund’s largest hold­ings.

He ex­plained that the mar­ket is prone to be­ing overly neg­a­tive about the prospect that some­thing sig­nif­i­cant may de­rail the abil­ity of tech­nol­ogy giants such as Face­book and Google to mon­e­tise in­ter­net traf­fic.

“That said, we have not added to Face­book in the re­cent slump, although we would not hold the stock at all if we did not ex­pect the com­pany to de­liver ro­bust earn­ings and cash flow growth,” he said.

He sold the en­tire Face­book hold­ing – the largest ever sale in the fund’s his­tory

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