U.S. Markets

Fidelity shows how unicorns hurt performance at popular funds

BOSTON (Reuters) - Fidelity’s bets on unicorn companies, the rare private firm or startup that grows in value to at least $1 billion, put a dent in the stellar performance of some of the company’s most popular mutual funds during the first half of 2017.

A sign marks a Fidelity Investments office in Boston, Massachusetts, U.S. September 21, 2016. REUTERS/Brian Snyder/File Photo

Fidelity disclosed this week, for example, how content-sharing company Pinterest Inc had an outsize impact on the portfolio performance of Contrafund, its most popular stock fund. It was one of the first times a company that had not yet done an initial public offering (IPO) made a Fidelity fund’s quarterly list of largest contributors and detractors to benchmark performance, Fidelity spokeswoman Nicole Goodnow said.

Pre-IPO investments can amplify a fund’s relative performance because they are not included in a comparison benchmark index. And the valuations attached to them by Fidelity and other mutual fund companies have far outpaced the stock market.

Fidelity’s $114 billion Contrafund disclosed that its small stake in Pinterest shaved 9 basis points off the fund’s relative return versus the S&P 500 Index.

Contrafund’s Series E stake in Pinterest was valued at $473.3 million in the first quarter. But at the end of May, that value was marked down by 17 percent, Fidelity disclosures showed.

But Pinterest was tied with TJX Companies Inc as Contrafund’s largest detractor in the second quarter, even though the pre-IPO company accounted for only 0.34 percent of the fund’s net assets.

Contrafund, which is run by star Fidelity portfolio manager Will Danoff, posted a total second-quarter return of 6.09 percent in the second quarter, easily beating the 3.09 percent total return on the S&P 500 Index.

The fund’s year-to-date return of 19.84 percent is better than 75 percent of U.S. large-cap growth mutual funds, according to Morningstar Inc data.

Fidelity’s valuation of Contrafund’s Series E stake in Pinterest has more than doubled since an initial investment of $159.4 million in October 2013, compared to Nasdaq’s 62 percent rise.

While Pinterest is a relative pipsqueak in the massive Contrafund portfolio, other Fidelity managers have made tech unicorns some of their largest holdings.

At the end of May, ride-hailing company Uber was a top 20 stock in Fidelity’s $22 billion Blue Chip Growth Fund. The fund’s Series D stake in Uber was valued at $251.5 million, or 1.14 percent of net assets.

Portfolio manager Sonu Kalra’s Uber stake is bigger than his bet on Starbucks Corp ($202 million) and Bank of America Corp ($157 million).

In the first quarter, Uber was among the fund’s largest detractors, shaving 12 basis points off the fund’s relative return. Only Qualcomm Inc and Lululemon Athletica Inc detracted more.

Reporting By Tim McLaughlin; Editing by Tom Brown