February 23, 2012
We've received a lot of questions recently about our holdings in Facebook following the social media firm's February 1 initial public offering (IPO) announcement. So we thought it would be helpful to explain, and to put into context, our approach to investing in this innovative sector.
At T. Rowe Price, we tend to manage broadly diversified portfolios, investing across the economic spectrum in a variety of industries, because we believe diversification tempers risk while still providing the opportunity for long-term growth. Social media investments generally represent a small portion of the T. Rowe Price funds that own them.
That said, we have a long history, dating back to the founding of our firm in 1937, of seeking to understand and invest in emerging companies in fertile fields that were ripe for long-term expansion. Back then, the emerging industries were pharmaceuticals, computers, and packaging. Today, many can be found in the Internet, health care, mobile computing, data analytics, and oil and gas drilling industries. We invest in companies in each of these areas.
The vast majority of our portfolio holdings are publicly listed firms. However, we do on occasion invest in private companies when our research uncovers compelling companies early in their life cycles and when the investment terms are favorable. And for a variety of reasons, many companies are waiting longer before choosing to list their stock.
Aside from the investment merits, we also believe that understanding innovative industries, such as social media, helps us understand industries across the economic spectrum. Developments in emerging industries often have enormous ramifications for more established industries. Think of the impact of air travel on the railroad industry. Or of the changes in music distribution wrought by the availability of music for purchase on the Internet.
Investing in social media companies involves special risks, including earnings disappointments and intense competition for market share that can result in sharp price declines. Diversification cannot assure a profit or protect against loss in a declining market.