The first move by the California State Teachers’ Retirement System was a good one. It got in on the Facebook IPO filing for 500,000 shares, worth about $19 million, then sold them quickly when the price jumped ever so briefly on Day One. That savvy move landed the CalSTRS Pension Fund about a quarter of a million dollars, not bad for a day’s work, but nothing spectacular either, given the initial investment (about 50 cents profit per share).
Not wanting to rest there, CalSTRS pension Fund soon bought even more shares, 1.2 million, and as the value of those shares has dropped like a rock in a well, it is faced with a whopping $17 million in paper losses at present. That’s no small blow for the country’s largest teacher’s pension fund.
The Facebook IPO filing hurt many investors, but could any of them afford such a loss less than the threatened pension funds for teachers who pour out their lives over decades into our children? The Facebook shares now stand at less than half of their original $38 offering price, and no one is predicting a quick uptick.
In reality, the Facebook fiasco will not wreck the CalSTRS pension fund and other teachers’ pension funds, but the loss did put another dent into funds that have been troubled by underfunding and poor returns. Most tracking of such pension funds’ returns show minimal gain since the dawn of this century. Some analysts believe that the Facebook losses could push these funds to go after even riskier investments, such as hedge funds and real estate, among others. Some think it could even lead to benefits being cut for retirees.
Facebook IPO adds to the misery of a highly employed industry
Does any professional community take more hits than teachers? Is any such group of workers less valued for the value that they bring to society? The Facebook IPO filing only adds to the misery of an industry that employs millions of bright, well-educated people who are underpaid and could probably direct their funds’ investments better than the people who manage them!
Some teachers’ pension funds are not taking their hits lying down. Three of them, from Arkansas, Fresno County and North Carolina, have recently joined a class-action lawsuit against Facebook in a suit filed in U.S. District Court in Manhattan. The suit alleges that Morgan Stanley and other underwriters tipped off select investors that Facebook’s revenue forecast had turned bleak. “We expect Facebook and the people who benefited from that sale to pay up,” said George Hopkins, executive director of the Arkansas pension fund, which has lost almost $3 million.
IPO’s are exactly what long-term investors should avoid!
For now, the California State Teachers Retirement System is content to wait and watch. “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,” a spokesman wrote in a recent email, in response to media queries.
Many analysts would not agree with that optimism, arguing that IPOs are exactly what long-term investors should avoid. One guru said that the chance of Facebook outperforming the market over the next 30 years were equal to the chances of someone being struck by lightning—about 1 in 1 million.
IPO’s underperform the stock market by 19.7% in first three years.
Hard numbers on the performance of IPOs is mixed. Jay Ritter, a professor at the University of Florida, has found that IPOs underperformed in comparison to the stock market by 19.7% in the first three years. Yet, companies with more than $500 million in sales beat the market by 2.6% in those first three years.
If you are a believer in omens, you would have had doubts about the Facebook IPO filing from the start: Nasdaq’s trading system delayed the offering and then bungled early trading, which cost brokerages about a half-billion dollars. Now, rumors are swirling about “selective disclosures” regarding Facebook’s early fortunes on the market.
Perhaps Facebook will rebound nicely and everyone will enjoy a happy ending, but for now teachers have received more bad news on top of more bad news regarding their retirement. You might not feel sorry for fat cats that can afford a few hits to their portfolios, but you have to feel a pang for the elementary school teacher who has given 40 years of her life to first-graders and now wonders if her benefits will be cut, again.