Pension funds should be staid and steady institutions making sound choices that set long-term trends for other investors – so what are they doing investing in Facebook?
Recent news of pension funds both in Europe and the US having been hit by losses as a result of Facebook investments must have had quite a few investment luminaries scratching their heads.
Having large retirement funds sink any money, no matter how “small” the amount, into a young and supposedly trendy company like Facebook is bound to cause a few raised eyebrows – it’s akin to a teenagers’ parents hitting the dance floor and causing much embarrassment.
However, in this case, it is the pension funds themselves that have been left red in the face as Facebook shares fell to less than half their original price – US$18.06 from the original selling price of $38. For example, the North Carolina Retirement Systems – which includes the pension fund for retired teachers and state employees – lost around $4m on its $26m investment in the Facebook IPO and its remaining shares in the company have now halved in value.
And it is not just US pension funds that made this blunder. European pension heavy-weights like Dutch APG and the Second Swedish National Pension Fund (AP2) also bought Facebook shares (330,500 and 88,200 respectively) which have lost 50% of their value.
In the US, the retirement funds copped much political flak for the failed investment and some have now filed a class action lawsuit against Facebook, with the NC Retirement System at its helm. But this smacks of closing the barn door after the horse has bolted.
Financial and political forums and discussion boards have been sparked alight not just by the news of the investment but also by this last ditch attempt to make up for the losses and the misdirected choice made.
But one has to wonder what made the pension funds allocate money to a company like Facebook in the first place. They might argue that the hunt for yield drove them to it. However, one could also presume that certain companies in emerging markets probably have a more stable business case than Facebook does.
This leaves us with the potentially dangerous conclusion that these institutions were swayed by the prospect of owning a bit of this “hot investment” when really they should be concentrating on long-term assets that won’t lose money for their members.