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Pension funds hit by Facebook

Many are stung as the social network's shares plunge to less than half the IPO price.

September 01, 2012|Andrew Tangel
  • Facebook stock, shown on a board in Times Square in New York, rises during the social network's initial public offering on the Nasdaq Stock Market.
Facebook stock, shown on a board in Times Square in New York, rises during… (Carolyn Cole, Los Angeles…)

NEW YORK — Wall Street investors aren't the only ones feeling the sting of Facebook Inc.'s falling stock: So are some of the country's troubled government pension funds.

Public employee retirement funds from around the country took part in the Menlo Park, Calif., social networking juggernaut's May 18 initial public offering and plowed millions of dollars into Facebook stock before its value plunged.

For The Record
Los Angeles Times Saturday, September 08, 2012 Home Edition Main News Part A Page 4 News Desk 2 inches; 69 words Type of Material: Correction
Facebook and pensions: In the Sept. 1 Business section, an article on how major pension funds invested in Facebook said that the California State Teachers' Retirement System "loaded up" on shares of the social network company. In fact, the pension fund notes, it acquired the shares through a passive investment strategy that replicates the Russell 3000 stock index, of which Facebook became part of after its initial public offering.

Facebook shares continued their decline Friday, falling $1.03, or 5.4%, to a record low of $18.06, or less than half their $38 offering price.

Although public pension funds staked only tiny portions of their multibillion-dollar portfolios on Facebook's fortunes, the stock's poor performance has added to the funds' woes.

Chronic underfunding and poor returns could lead pension funds to pursue riskier investments such as hedge funds, private equity, commodities and real estate, or even cut benefits for retirees.

Three pension funds have joined a class-action lawsuit against Facebook and its underwriters. The suit, filed in U.S. District Court in Manhattan, N.Y., alleges that lead underwriters led by Morgan Stanley gave only some select investors a heads-up that Facebook's revenue forecast had soured.

"We expect Facebook and the people who benefited from that sale to pay up," said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO.

The Arkansas teacher pension fund is part of a group of institutional investors that includes the Fresno County Employees' Retirement Assn. (estimated Facebook losses: $1 million) and the North Carolina Retirement Systems (estimated losses: $12.4 million). The group has filed papers seeking to become lead plaintiffs in the case.

Two major California pensions also bet big on Facebook.

The California Public Employees' Retirement System, the country's largest public pension, refused to reveal how many shares it bought in the IPO. CalPERS had 557,140 Facebook shares on May 23 and more than doubled its stake to 1.3 million shares as of this week, a spokeswoman said.

The California State Teachers' Retirement System bought about 500,000 shares in the IPO -- worth about $19 million -- and sold them when the price popped on the first day. CalSTRS made about $250,000 on the sale, a spokesman said.

CalSTRS has since loaded up on 1.2 million Facebook shares, a stake that has cost the pension fund about $17 million in paper losses, a spokesman said.

"As a patient, long-term investor with a 30-year investment horizon we believe that over time, the stock and the company should perform well," CalSTRS spokesman Michael Sicilia said in an email.

Facebook's IPO was fraught with problems. First there was trouble with the Nasdaq Stock Market's trading system, which delayed the offering and then botched early trading, costing Wall Street brokerages an estimated $500 million. Then came revelations of selective disclosure about Facebook's declining fortunes.

The stock has since languished and could see more pressure as company insiders become eligible to sell more than 1.2 billion shares later this year.

Facebook did not respond to a request for comment.

Still, pension funds don't plan to eschew future IPOs because of their experience with Facebook.

"We can't swear off of them entirely -- we'd be missing out on a big piece of the equity market," said Phil Kapler, head of the Fresno County Employees' Retirement Assn., who noted that every public company at some point came to the market in an IPO.

Research by Jay Ritter, a professor of finance at the University of Florida who has studied initial public offerings, shows that average three-year returns of IPOs from 1980 until 2010 have underperformed the broader stock market by 19.7%.

But companies with more than $500 million in sales before their IPOs had average three-year returns that beat the market by 2.6%, according to Ritter's research.

"I would not recommend excluding all IPOs as part of a diversified portfolio," Ritter said.

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andrew.tangel@latimes.com

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