US fund man­agers look for sub­sti­tute

• US mu­tual funds bail out of the com­pany, fu­elling share price slide of 35%

Business Day - - Front Page - David Ran­dall New York

Con­cerns about Face­book’s de­clin­ing profit mar­gins and bat­tered rep­u­ta­tion have prompted 93 US mu­tual funds to com­pletely sell out of their po­si­tions in the firm so far in 2018, ex­ac­er­bat­ing a roughly 35% de­cline in the so­cial me­dia com­pany’s share price from its highs, ac­cord­ing to Refini­tiv’s Lip­per re­search ser­vice.

Con­cerns about Face­book’s de­clin­ing profit mar­gins and bat­tered rep­u­ta­tion have prompted 93 US mu­tual funds to com­pletely sell out of their po­si­tions in the com­pany so far in 2018, wors­en­ing a 35% de­cline in the so­cial me­dia com­pany’s share price from its highs, ac­cord­ing to Refini­tiv’s Lip­per re­search ser­vice.

The selling by firms in­clud­ing Fidelity In­vest­ments, The Hart­ford and Put­nam In­vest­ments com­bined for a to­tal of nearly 12mil­lion shares, and came amid sim­i­lar moves to liq­ui­date po­si­tions in the com­pany by prom­i­nent growth-fo­cused hedge funds. Jana Part­ners and Third Point, for in­stance, to­gether sold nearly 3.7-mil­lion Face­book shares in the third quar­ter, ac­cord­ing to se­cu­ri­ties fil­ings.

Funds that have dumped Face­book, whose shares helped lead the broad US mar­ket higher over the past two years, are now favour­ing in­vest­ments rang­ing from pay­ments com­pa­nies such as Visa and World­pay to con­sumer com­pa­nies in­clud­ing Pep­siCo and Chef’s Ware­house be­cause they ex­pect the trou­bles at the so­cial me­dia com­pany to con­tinue as it leaves its era of rapid growth be­hind.

Face­book was rocked by dis­clo­sures in 2018 that per­sonal in­for­ma­tion of up to 87-mil­lion users may have been im­prop­erly shared with po­lit­i­cal con­sul­tancy Cam­bridge An­a­lyt­ica.

DATA PRI­VACY

“The rev­e­la­tions in the first quar­ter of 2018 about data pri­vacy is­sues and the grow­ing global con­cerns about data se­cu­rity and the po­ten­tial for in­creased reg­u­la­tion made it chal­leng­ing to hand­i­cap the re­quired in­vest­ments to rem­edy some of these is­sues, which we an­tic­i­pated would weigh mean­ing­fully on earn­ings growth in com­ing quar­ters,” said Jim Hamel, port­fo­lio man­ager of the Ar­ti­san Global Op­por­tu­ni­ties Fund.

Hamel’s fund, which liq­ui­dated its po­si­tion in May, reaped a nearly 400% gain on Face­book after buy­ing dur­ing its ini­tial pub­lic of­fer­ing in May 2012, which was priced at $38 a share. Hamel said he has used the gains to add to po­si­tions in the fast-grow­ing global dig­i­tal pay­ments in­dus­try such as World­pay, whose shares are up 12% for the year to date.

Greg Woodard, MD at Man­ning & Napier, said his firm, which be­gan buy­ing Face­book in Novem­ber 2012 at about $20 per share, sold all its Face­book shares in 2018 as part of a broad move away from cycli­cal tech­nol­ogy com­pa­nies.

Face­book’s “most re­cent guid­ance re­ally sub­stan­ti­ated the mar­gin con­trac­tion that we had started to worry about, and when we looked at the price and our fu­ture growth ex­pec­ta­tions they didn’t match up with what the mar­ket was fore­cast­ing ” , Woodard said.

Woodard said his firm has added po­si­tions in soft­ware de­vel­oper Epam Sys­tems and global bev­er­age firm Pep­siCo and has been adding to its po­si­tion in Ama­zon.com on dips.

NO-MAN’S LAND

While Face­book is now trad­ing at a more com­pelling val­u­a­tion fol­low­ing the steep de­clines in its share price, ques­tions about its abil­ity to main­tain and ac­cel­er­ate its growth rate may leave it in a no-man’s land be­tween a growth stock that ap­peals to in­vestors fo­cused on rapid ex­pan­sion and a value stock that ap­peals to in­vestors look­ing for com­pa­nies that trade at a dis­count or of­fer at­trac­tive div­i­dends.

“Once a com­pany gets put into the penalty box by a growth in­vestor, it’s hard to get out,” said Todd Rosen­bluth, di­rec­tor of mu­tual fund re­search at in­de­pen­dent re­search firm CFRA.

“When a stock is per­ceived as a bro­ken growth stock it loses its ap­peal, whereas a de­clin­ing stock price for a value stock can of­ten make it more ap­peal­ing.”

Woodard said his firm would not pur­chase shares of Face­book again in its growth strate­gies, and if he were to buy it again he would put it into a fund that fo­cuses on “com­pa­nies that need to fix them­selves”.

For that to hap­pen, Face­book’s stock price would need to be “sig­nif­i­cantly lower ” , he said. “The gap is not worth putting a num­ber on it.”

WHEN WE LOOKED AT ... OUR GROWTH EX­PEC­TA­TIONS THEY DIDN ’ T MATCH UP WITH WHAT THE MAR­KET WAS FORE­CAST­ING

/Reuters

Shape of things to come: A Face­book sign at the China In­ter­na­tional Im­port Expo, at the Na­tional Ex­hi­bi­tion and Con­ven­tion Cen­tre in Shang­hai, China, in Novem­ber.

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