Why mutual fund investors should be wary of a startup bubble

 

In an interesting twist, regulators are not focusing on angel investors and venture capital firms to determine how a record number of startups are scoring $1 billion-plus valuations. Instead, the Securities and Exchange Commission is examining whether U.S. mutual funds have the correct measures in place to accurately price private technology companies, reports the Wall Street Journal.

According to venture-capital research firm CB Insights, $8.3 billion has been invested this year by five of the biggest mutual fund firms participating in funding rounds for private companies, compared to about $1 billion just four years ago. That means millions of Americans may own a piece of high-flying startups like Uber, Snapchat or AirBnB through their mutual funds without even realizing it.

The influx of cash is what’s grabbing the attention of regulators, notes Yahoo Finance market reporter Nicole Sinclair in the above video. “As more mutual funds turn to these startups to develop their portfolios, there’s going to be more scrutiny."

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And the disparity among valuations by mutual funds is a sign of danger for individual investors. BlackRock priced its holdings in Uber at $40.02 per share on June 30, 2015, while Fidelity valued the same share 16.7 percent lower at $33.32, and Hartford Financial Services Group recorded a price of $35.67.

And it’s not just Uber. According to findings by Morningstar, there were 12 cases over the past two years in which startups worth at least $1 billion were valued differently by mutual funds on the same date.

The Wall Street Journal reports some SEC examiners are shifting more of their focus in their regular mutual fund reviews to hard-to-sell securities, which include shares of private companies. The amount of hard-to-sell shares is an indicator of how easily a mutual fund investor would be able to get his or her money back.

Fidelity Investments, T. Rowe Price Group Inc., and BlackRock Inc. are among the biggest money managers investing in private tech companies.