Vanguard fund marks down Uber shares

Pricing nontraded shares is often more art than science

Feb 2, 2018 @ 1:46 pm

By John Waggoner

Vanguard marked down the investment its U.S. Growth Fund (VWUSX) had made in Uber Technologies Inc. by 15.8% in the fourth quarter — an indication of the problems funds can encounter when dabbling in so-called unicorn technology stocks.

For last year as a whole, Vanguard marked down the fund's Uber investment by 28%, moving its price per share down to $35.10 from $48.77 at year-end 2016, said Dan Wiener, editor of The Independent Adviser for Vanguard Investors,a newsletter.

For shareholders, the Uber effect is infinitesimal: the ride-sharing app's shares represent just 0.6% of U.S. Growth's $8.47 billion in assets.

Nevertheless, the fund's Uber woes represent the dangers of dabbling in untraded high-tech company shares. Because they are untraded, funds often book their purchases at the offering price, then use a variety of ways to value the shares. In Vanguard's case, it's an independent committee that's separate from fund managers.

"When calculating the fair market value of a company, this committee considers a number of factors including offering price, financial performance, market conditions, corporate actions, and guidance from external advisors," Vanguard spokesperson Laura Edling said in an email. "While we can confirm Uber's share price did decrease, we cannot comment further on the valuation of specific securities."

The U.S. Growth Fund also has several other private holdings, including Airbnb Inc., Pinterest preferred stock and WeWork Cos. Inc. stock, said Jeffrey DeMaso, co-editor of the Independent Adviser for Vanguard Investors. Vanguard International Growth (VWIGX) has small stakes in Spotify Technology, Flipkart and HelloFresh.

While Vanguard's website notes that its funds may invest up to 15% of their assets in restricted securities with limited marketability or other illiquid securities, its holdings of those types of securities are extremely modest. Vanguard is not alone in dipping into the pre-IPO market. Fidelity, T. Rowe Price and other major fund companies have dabbled in the area.

The problem is that initial valuations in the pre-IPO market are often overly optimistic. A recent study at Stanford University, "Squaring Venture Capital Valuations with Reality," showed that overvaluations can reach 100% or more. Consider Square, the internet payments company, whose venture financing round put the company's value at about $6 billion. It went public at $3 billion in 2015.

Similarly, while investors valued Dropbox at $10 billion in 2014, fund firms including Fidelity, BlackRock and USAA have marked the stock down since then. The company confidentially filed for an IPO this year.

(More: Tax reform will boost food, chemicals, rail stocks. Technology? Not so much)

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