July 8, 2011

Less Risky Ways to Invest in Social Media: Portfolio Fix

Many investors may prefer to access these types of volatile issues through broadly diversified mutual funds and exchange traded funds.

Looking to invest in social media companies? Watch out for the risk. (Photo: AP) Looking to invest in social media companies? Watch out for the risk. (Photo: AP)

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It’s hard to buy a cup of coffee or pair of socks these days without being urged to “like us on Facebook” or “follow us on Twitter.” The speed at which the corporate world has embraced social media is matched only by the speed at which the social media itself is changing.

(For those still using the telephone and even postcards to communicate, social media is a term that describes a wide array of Internet-based services used to create and distribute content in different ways. It was pioneered, to some extent, by Friendster, a social networking site started in 2002 that has long since been supplanted by the industry’s behemoth, Facebook. Another one-time social media darling that has suffered lately is MySpace, which was purchased by News Corp., in 2005 for $580 million and sold last month for $35 million.)

Fund-management companies like Vanguard, PIMCO, Charles Schwab, Putnam, and others are now using social-media outlets to promote their funds, and as social media companies grow in popularity and profitability, they are beginning to turn up in the portfolios of mutual funds and exchange traded funds – sometimes even before they have completed an initial public offer.

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The bellwether for social-media companies thus far is Mountain View, Calif.-based LinkedIn, which calls itself “the world’s largest professional network on the Internet” with more than 750 million members in over 200 countries.” LinkedIn stock debuted in May, with shares priced at $45. The stock soared as high as $120 on its first day of trading. At a recent price of about $93 per share, the company was valued at more than $8 billion.  

Fortune did not smile so warmly on purchasers of shares in Renren, a Chinese social-networking company with its sights focused on college students and that’s drawn comparisons with Facebook. Renren’s U.S.-listed ADRs were priced at $14 and zoomed to $24 during their first day of trading but fell afterwards, declining to nearly $6 before recovering to a recent $11.

Shares in Pandora Media, an Internet-media company focused on music, have turned in mixed results; priced at $16, they reached as high as $26 on their first day, but fell to nearly $12 just two days later and traded at about $18 more recently.

Public offerings of shares in social-buying site Groupon, social-games company Zynga, micro-blogging site Twitter, and the king of them all, Facebook, are expected to come by the end of next year. Groupon and Zynga have already made their filings with the SEC.

Buying and selling IPO stocks can be challenging, and even dangerous, and many investors may prefer to access these types of volatile issues through broadly diversified mutual funds and exchange traded funds.

There are at least three funds that target initial public offerings: the Direxion Long/Short Global IPO Fund, the Renaissance Capital Global IPO fund, and the First Trust US IPO Index fund. As far as we know, these funds have not taken major stakes in LinkedIn or other social media companies.

For investors who want to own a piece of the social-media phenomenon through a diversified fund, other options do exist. For those looking to get as much social media exposure as they can, the $61 billion Fidelity Contrafund seems like a good place to start. As of May 31, the fund owned about $86 million, or 0.11% of its assets, in Facebook Class B shares, $82 million in Groupon, and another $82 million in Zynga shares – none of which are yet publicly listed. The fund also owned another $43 million worth of Renren.

The $16.7 billion Fidelity Puritan Fund had about $22 million, or 0.11% of assets, committed to Facebook Class B shares as of that date, another $20 million to Renren, and $2.8 million to LinkedIn.

Fidelity’s Blue Chip Growth fund had about $16 million in Facebook Class B, $9.5 million in Renren, and $2 million in LinkedIn at the end of May.

Among other funds, Morgan Stanley Mid Cap Growth fund owned stakes in Groupon (0.75% of assets) and Zynga (0.73%) at the end of May.

As of March 31, the T. Rowe Price Science & Technology fund had $21 million, 0.63% of assets, invested in Twitter, $11.8 million in Facebook, and $14 million in Groupon.

Another option is GSV Capital, a closed-end fund formed in September 2010, invests in privately-held companies backed by venture capital and some publicly traded shares. In late June 2011, it announced that it had paid $6.6 million for about 225,000 shares in Facebook, sending its shares soaring 42% in one day.

Of course, buying into the social-media frenzy entails taking a big risk. Many of these companies are marginally profitable, if they make money at all, which several do not. Market conditions may change that derail their intentions to list their shares, which would make it harder for funds that own them to sell. Still, investors enthusiasm is still a powerful – possibly the most powerful – force on Wall Street, and the bullishness behind social media looks likely to stick around, at least for now. 

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