Alibaba (BABA) IPO: Were Mutual Funds Favored by Alibaba IPO?

Apart from what the Federal Reserve decides on rate hike during its two-day FOMC meeting last week, investors kept glued to the turnout of the much-awaited Alibaba IPO. While the Fed decided to take ‘considerable time’ to hike rates, Alibaba lost no time to lap up over $21.8 billion on its debut on the New York Stock Exchange. However, the country’s biggest IPO was not devoid of certain allegations. The allegations went as far as stating that the Chinese e-commerce giant snubbed hedge funds and favored mutual funds.

The Allegation

A CNBC report titled That’s it? Some hedge funds snubbed in Alibaba IPO allocation claims that hedge funds were allotted substantially lower amount of shares than what they requested. The article alleged an “ultra-selective process that favored investors who already have a close relationship with the company.”

Terming the allocation as “pathetic” a particular hedge fund manager said his fund had requested for $200 million in Alibaba shares but received not even a million worth of shares. Another hedge fund house was said to have received only 1, 000 shares while it had asked for several million dollars worth of shares.

The same report said: “A person familiar with the matter said that Alibaba’s management and the underwriting banks spent nine hours yesterday going through investor orders. Investors with the longest relationship with the company tended to receive the best treatment, the person said. “If they were early believers they were treated differently than if they were new to the company,” he said.”

Mutual Reasoning for Funds & Alibaba

Talking of mutual funds, reports suggested Fidelity, BlackRock and T. Rowe Price Group Inc. were among the big institutional players asking for the largest allocations. These fund houses were joined by Wellington Management Co. and Putnam Investments LLC in probably having interest to own a large chunk. Each of these firms were said to have asked for over $1 billion of shares. Alibaba had also raised the top end of the fundraising target, lower than what advisers proposed.

Attractive valuation of Alibaba attracted the mutual funds. Separately, Alibaba itself too had reasons to opt for mutual fund houses.

“Heavy demand from the biggest mutual funds, which take a long-term view and can place larger orders, would give Alibaba the confidence to push for a higher price or to sell more shares,” noted a Bloomberg report. Perhaps, this being true, Alibaba was indeed looking for the mutual funds to get a larger stake as they assured credibility and would keep the stock for longer term.

On the other hand, mutual funds scored over hedge funds as the former is heavily regulated and have to make more disclosures. Hedged funds can add or shed positions rapidly.

Avoiding Facebook Trouble

Facebook’s (FB) IPO on May 18, 2012 was spoiled by mismanagement and technical glitches that cost stock brokers and investors millions of dollars. Although the stock debuted at $42.05, it closed the IPO day with a gain of only 23 cents. Facebook had priced shares at the high end, which discouraged large fund houses as they were worried about the social media platform’s growth. Retail investors held most of the stocks, who then participated in a selling spree.

Supposedly, Alibaba was trying to avoid the Facebook IPO fiasco, and wanted investors who would keep the stock in their portfolios for longer duration.

Funds in Focus

It is not easy to predict right away which mutual funds now boast substantial holdings in Alibaba. Mutual funds generally declare their asset portfolios at pre-set intervals. Until we have the latest numbers from the families of mutual funds discussed, it would be difficult to quantify exactly how much of these IPO is being held by each fund in percentage terms.

However, let’s focus on tech mutual fund picks from the fund families discussed here, Fidelity, BlackRock and T. Rowe Price Group. Let’s look at technology funds from each of these fund families that have the highest returns over the last one year.

Fidelity Select Electronics Portfolio (FSELX) seeks growth of capital. The fund invests mostly in companies related to the designing, manufacturing and selling of electronic components. The fund invests in both domestic and non-US companies using fundamental analysis and also looking into market and economic conditions.

The fund’s top holdings currently include Intel Corp (INTC), Broadcom Corp (BRCM), Texas Instruments Inc (TXN), Altera Corp (ALTR) and Micron Technology Inc (MU).

The fund currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 37.9% over the last one-year period.

Other tech funds from this firm such as Fidelity Select Communications Equip Portfolio (FSDCX) and Fidelity Select Computers Portfolio (FDCPX) carry a Zacks Mutual Fund Rank #1 (Strong Buy) and Zacks Mutual Fund Rank #2 (Buy) and have returned and 15.2% and 21.1%, respectively.

T. Rowe Price Global Technology (PRGTX) invests a lion’s share of its assets throughout the world in the common stocks of companies that generate a majority of their revenues from the development, advancement, and use of technology. The fund invests in a minimum of 5 countries and a minimum of 25% of its assets is invested in foreign companies.
The fund’s top tech holdings currently include Amazon.com Inc (AMZN), LinkedIn Corp Class A (LNKD) and Salesforce.com Inc (CRM).

The fund currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has returned 38% over the last one-year period.

Other tech funds from this firm such as T. Rowe Price Science and Technology Fund (PRSCX) and T. Rowe Price Media and Telecommunications Fund (PRMTX) carry a Zacks Mutual Fund Rank #3 (Hold) and have returned and 26.1% and 16.9%, respectively.

BlackRock Science & Technology Opportunities Investor A (BGSAX) invests a major portion of its assets in companies from technology and science sector which are expected to attain sustainable growth by utilizing advanced technology. A maximum of 25% of its assets may be invested in companies from emerging economies. It may also invest in private securities.
The fund’s top tech holdings currently include Apple Inc (AAPL), Microsoft Corp (MSFT), Facebook, Tencent Holdings Ltd. (TCTZF), Google Inc Class A (GOOGL).

The fund currently carries a Zacks Mutual Fund Rank #3 (Hold). The fund has returned 19.4% over the last one-year period.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.
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