Invest in SpaceX Alongside Elon Musk? Why This Closed-End Fund Is Not Worth the Ride

Jack Shannon, senior manager research analyst for Morningstar Research Services, talks about the mania around Destiny Tech 100 and how much investors are paying to own the closed-end fund compared with what it’s worth. Margaret Giles, Morningstar Inc editor, discusses how life-stage investing can help pre-retirees and retirees map their priorities.

Nvidia’s 10-for-1 Stock Split

Target’s Weak Sales and Declining Market Share

Vanguard’s New CEO Starting Soon

Investing for Each Life Stage

Financial Priorities When You Approach Retirement

Why Investors Should Think About Withdrawal Sequencing During Pre-Retirement

Why Retirees Struggle to Start Tapping Into Their Portfolios

Financial Priorities When You Retire

What Investors Need to Know About Destiny Tech100

Closed-End Funds vs Open-End Funds

Why Destiny Tech100’s Net Asset Value Premium is “Insane”

Should Investors Own Destiny Tech100 Over Other Mutual Funds with Startup Stocks?

Key Takeaways for Investors

Read about topics from this episode.

Nvidia Earnings: AI Demand Smashes Expectations Again

Target Earnings: Margins Hold Up, but Top Line Constrained by Weak Discretionary Spending

Vanguard Chooses an Outsider as Its New CEO

An Investing Guide for Every Life Stage

The Bucket Investor’s Guide to Setting Retirement Asset Allocation

DXYZ: This Closed-End Fund Is Not Destiny’s Child

What to watch from Morningstar.

Maximize Credit Card Points for Better Trips and Rewards

Inherited IRA Investors Get Another Break, but the Clock Is Ticking on RMDs

Short-Term Market Volatility Could Provide Long-Term Investing Opportunities

Magnificent Seven Stocks: What’s Going on With Apple, Tesla, and Alphabet?

Read what our team is writing:

Ivanna Hampton

Margaret Giles

Jack Shannon

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Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Nvidia’s stock split is coming soon. What Morningstar thinks of the chipmaker’s value and outlook as AI demand surges. Plus – why investors may want to steer clear of a meme sensation promising exposure to high-flying startups like OpenAI and SpaceX. And – a checklist for Gen Xers and baby boomers planning for retirement. Morningstar Inc editor Margaret Giles is back to explain how life-stage investing can help people meet their goals. This is Investing Insights. Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Nvidia announced a 10-for-1 stock split along with its blockbuster first-quarter earnings. Investors will receive nine additional shares for each one they already own after the market closes on June 7. The split will not affect the value of Nvidia from Morningstar’s point of view. But it will make the stock more accessible to smaller investors. The chipmaker’s revenue soared to $26 billion in Q1. Management said demand for its next generation of products should exceed supply into 2025. Morningstar sees no signs of AI demand slowing either. It predicts strong revenue growth from data centers over the next several quarters. And believes Nvidia will continue to benefit from the AI boom. The oversaturation risk looks low. Morningstar raised its estimate for what Nvidia’s stock is worth to $1,050 from $910. After the stock split, Morningstar anticipates shares will be worth $105 each. The stock will remain fairly valued.

Target appears to be losing market share as a key metric of the retailer’s health softens. Comparable sales fell about 4% in the first quarter. Meanwhile, Walmart posted 4% growth. Target’s sales declined in non-essential categories, like home decor, and essential categories, like food and household goods. It recently announced it is lowering prices for 5,000 popular consumer basics and other items. The cuts may be a response to weak sales. Morningstar forecasts Target’s full-year sales growth to be flat. It’s in line with the low end of management’s outlook from flat to 2%. That implies some sales improvement in the coming quarters. Here’s a positive note: Target’s operating margins are holding up despite declining sales. But Morningstar expects price competition to intensify among retailers. Morningstar thinks Target’s stock is worth $136 and overvalued.

Vanguard’s new CEO will bring an outsider’s perspective. Former BlackRock executive Salim Ramji will succeed Tim Buckley as CEO and start on July 8. Ramji will be the first Vanguard chief who did not rise through the fund family’s leadership ranks. Vanguard managed more than $8 trillion from roughly 50 million clients globally at the end of March. It led most asset-management firms, with more than $110 billion of inflows last year. The firm came second only to BlackRock. Morningstar thinks Ramji will face challenges once he settles in. Vanguard has struggled with investors choosing ETFs over actively managed funds. Customer complaints remain a sore spot. Vanguard recently received some backlash for raising fees on some of its brokerage services. It’s also had trouble expanding into new markets outside the United States. Vanguard has invested heavily in its advice business and ETF lineup over the past several years. Ramji has experience with both areas from his BlackRock days. However, it remains to be seen what his appointment means for Vanguard’s culture and direction.

Life stage investing helps investors make sense of their evolving financial priorities throughout their lives. Morningstar, Inc. Editor, Margaret Giles, recently joined the podcast to introduce Morningstar's investing guide for every life stage. She explained what early and mid-career accumulators like Gen Z and Millennials should keep in mind. Now, Margaret is back to break down the final two life stages.

Welcome back to the podcast, Margaret.

Margaret Giles: Happy to be back.

Hampton: So, let's get into it. You already talked about the first two life stages. Give us a quick recap and describe what's next.

Giles: Absolutely. So, we talked about early and mid-career accumulators. So, like you said, roughly Millennials and Gen Z. But what we really like to think about these different groups is rather than age, what life stage or what stage in your career, how far do you have until retirement? So, it's not exactly aligning with age exactly. It's more these other factors. Maybe you have kids, maybe you've these different priorities. And we did talk about different priorities and a lot of balancing acts of these two life stages. So, you've got setting up an emergency fund, you've got building an investment portfolio, you've got balancing different goals like retirement, buying a house, paying for education. The list goes on.

So now that we've talked about these two, we've got two more life stages to cover. So that's pre-retirement, so roughly 50s, 60s and then retirement, so 60s and beyond. And that's a big shift in focus. So, before you're balancing many priorities, now you're really zeroing in on retirement, which is a big one. And you're probably facing a lot of uncertainty. And there's a lot of question marks as you head into these new life stages and that can be intimidating. So, like before, we're going to try and make it a little less intimidating by breaking down your priorities and putting them into a manageable checklist.

Hampton: Well, let's start with pre-retirees first. What should they make a priority?

Giles: Absolutely. So, to start off – this will be familiar – you want to keep building your human capital – so that's your education, career skills. You really just want to keep maximizing your earnings by building yourself up. Then you want to start thinking about your Social Security strategy. So that's a big one for a lot of people – when are you going to start taking Social Security? Then you want to maintain your safety net. That's kind of a continuation from before. You've got your emergency fund. You want to keep that. You've got your different insurance. You want to keep that. Then you want to assess the adequacy of your retirement portfolio. That's the big question of, am I going to be ready to retire in 5, 10, however many years? And then after that, you really want to think about increasing your pre-retirement savings rate. So, before you were paying for a lot of different things, maybe a house, maybe education. Now you likely have a little more breathing room to put more money away to retirement. Then with that portfolio, you want to think about investing in safer securities, protecting what you have. And then lastly, you want to think about your withdrawal sequencing. And that's the order in which you'll take out money from those different accounts that you have in retirement.

Hampton: You mentioned withdrawal sequencing. I mean, that sounds like a major decision for retirees. Why should investors think about it during the pre-retirement years?

Giles: Absolutely. So, it's a big decision. And it's important to be strategic here because deciding that order can actually influence how you position each of those accounts. So, in general, the standard sequence is taking money out of taxable accounts first, followed by traditional tax-deferred, and then following up with Roth. So that's the general sequence. And that means to start off, you want your most liquid assets, think emergency fund and taxable. And then on the other hand, you want your most aggressive earning potential investments in your Roth because that's happening at the end. You've got a long tail, hopefully, depending on how long your retirement goes. And then in the middle, which is likely the biggest part of your investments, are those traditional tax-deferred accounts. And so, you want a blend to bridge those two in the middle. So, you've got your risky investments and then some safer income-producing in the middle.

Hampton: That is a great visual. I saw that as you were describing it. Saving for retirement is the biggest goal for many investors. Why is it so hard for retirees to start tapping into their portfolios, Margaret?

Giles: You know, honestly, it's just a big psychological pivot. You've been, hopefully, saving for retirement your entire career. And so, you get into that process. It's the same way that it's sometimes hard to retire from your career. You've defined yourself in a certain way. You have your set path that you take. And then suddenly you have to have this huge shift where you were building, building, building, and then suddenly you're taking away. And that's hard. And it's psychologically just that huge turn. And so, like I mentioned earlier, too, there is a lot of uncertainty. Retirement is a bunch of question marks. Have I saved enough? What if the market turns? What if I live to 110? There's so much that you have to think about, including your own mortality. Come on. So, all that together means it's a hard transition and makes total sense.

Hampton: We can show ourselves some grace and take a deep breath.

Giles: Exactly. Yeah, absolutely.

Hampton: So, can you break down what investors should prioritize in retirement?

Giles: Yes. So, to start off, you want to think about – you're going back to your early career days where you're first thinking about a budget because it looks different now. Your income looks different. Your spending can look different. So that's step one. Step two, you want to take stock of and maximize your guaranteed sources of income. So, for a lot of people, Social Security, maybe you have a pension. Not a lot of people do anymore, but if you do, great. And then you have to think about, am I going to annuitize? How much am I going to annuitize? That's another way of building income. Decide if that's right for you.

Then after that don't rule out some kind of work. It doesn't have to be what you were doing before. It doesn't have to be full-time, but it can be a great way to supplement what you have in retirement. And then after that paired with that, really, you want to make sure you still have, again, that safety net. So that's insurance of different kinds. That's your emergency fund. And think again, uncertainty. And then after that, you want to stay flexible on the withdrawal rate front. So that means, as your life changes, as the markets change, thinking about adjusting your spending accordingly. And then pay attention to tax matters. That gets back to the withdrawal sequencing front, where depending on what you're pulling from, there are different tax considerations.

And then the last two – you want to right-size your portfolio's risk profile. So that means that you have a good combination of safe assets and then more risky, maybe give you more return assets, but you're not panicking over those risky assets, right? Christine Benz actually has a really helpful bucket approach that can help retirees really think about how to segment those different parts of their portfolio. And the last one is you want to make sure that you're giving due attention to your estate and your portfolio succession plan. That's the last step.

Hampton: Well, I'm glad you mentioned Christine, because we'll put a link to her article about her bucket approach in the show notes. And we'll also put a link to Morningstar's investing guide for every life stage in the show notes. So, everyone, please check those out. Thank you, Margaret, for coming back to the table and breaking down what pre-retirees and retirees should know.

Giles: Of course. Thanks for having me.

Hampton: A relatively new closed-end fund pitches its portfolio as a way to own a piece of privately held companies. Destiny Tech100 started trading this spring. The closed-end fund, holds shares of high-flying startups like SpaceX and OpenAI, should everyday investors join the ride or steer clear. Jack Shannon is a senior manager research analyst for Morningstar Research Services. He's investigated Destiny Tech100 and is here to share what he's found.

Welcome back to the podcast, Jack.

Jack Shannon: It's a pleasure to be back.

Hampton: So I know you got some strong views on this fund, but let's start with how a closed-end fund like Destiny Tech100 differs from an open-end fund.

Shannon: Yeah, so there are two different kinds of closed-end funds. So there's interval funds and then there's like exchange traded closed-end funds. This is the exchange traded closed-end fund version. And so most people are used to the mutual fund vehicle. A mutual fund is only issued by a fund company. So if you want to sell your shares of a mutual fund, you go to the fund company and say, hey, I'd like my money back, here are your shares. And that's the mechanism to get the redemption of the shares in process. With a closed-end fund, the closed-end fund raises money and issues shares. And then those are the only shares that are available to investors. So they trade on an exchange. And so if you're an investor and you want a piece of it, you have to go to the exchange to buy it. Now, why that matters is because if you're a mutual fund owner, when you go to trade your shares back to the mutual fund company, they will give you the NAV, the net asset value, which is the fair market price of all the securities in the portfolio. With a closed-end fund, there is no connection to an NAV. It's whatever the market determined the price to be. And so there are very different operational aspects to these that people need to be aware of.

Hampton: So can you talk about Destiny Tech's NAV, or net asset value and why you call the closed-end funds premium "insane".

Shannon: Yes. So, again, the NAV is what the value of the securities are today. And so with a mutual fund that owns publicly traded companies, it's easy. It's easy to calculate. You look at the closing price of each security, multiply it by the number of shares the fund owns, and then you get the aggregate value of the portfolio divided by the shares outstanding, and that's your NAV. With Destiny Tech100, it's a bit more complicated because they own private companies, which do not trade, and there are very few platforms for these companies to trade on. And so basically, fund companies are left to their own devices to value these things. And so Destiny Tech100 publishes an NAV, which it just recently did the other day, and it was $5.07. But what you actually get on the market for trading it can be very different. And so when I wrote this piece, the NAV was like $4.84, but it had traded 20 times that at one point.

And so that's quite literally trading $20 for $1 unless you think that the NAV is wrong, which is one, I'm trying to find some logic in it, and there could be people who think that these securities are very underpriced, and maybe that's why they're willing to pay that amount. But at the end of the day, because it's an exchange traded closed end fund, the price in the market can get very divorced from the underlying value of the portfolio and that's what we saw. We saw a huge spike where it got to over 20x. It fell down to about 8x and now again it's the 5.07 NAV and as of this morning it was trading around $15. So it's still three times more than. So if you pay $15 you're paying three times more for the portfolio than what the fund company is telling you they think it's worth. So it's a little crazy to me.

Hampton: Well you made that plain and clear. So other mutual funds hold startup stocks like SpaceX, OpenAI and Stripe. Could there be a case for holding Destiny Tech100 instead of one of those mutual funds?

Shannon: I don't think so. So, with those mutual funds you're getting a large, diversified portfolio on top of the usually small sliver of private exposure that those funds have. So if you think about SpaceX which I think is what's driving the Destiny Tech100 mania because it's a third of the assets in the portfolio. People are excited about rockets, Elon Musk is a charismatic guy. People want to invest alongside him. They see this. They say, oh this is a way to get a piece of that. That's a venue to do it but you have to pay right now 3x what it's worth or what seems to be the fair value for it. Whereas there are mutual funds out there like Baron Partners is an example where about 12% of that fund is in SpaceX but when you go to buy that fund you're going to pay the fair value for SpaceX as part of the NAV that you would pay when you go to buy shares. So, it's ultimately a calculation that an individual has to make in terms of why they're buying something to begin with but it's very hard to ignore the valuation side and ignore that you're paying a multiple more for access in Destiny Tech100 versus access in a mutual fund.

Hampton: So what are one or two more takeaways that investors should keep in mind?

Shannon: I think they should be aware that investing in private companies sounds exciting but it's really not. You know there was a run there about for the last decade where private equity and venture capital looked untouchable. Mostly fueled in my opinion by low rates where it was just sort of a game of hot potato where like hey we raise a little bit more money okay we're going to sell it in this way. And so what looked like ever climbing valuations made the asset class look tremendous and everyone was like well only accredited investors can get it I need to get access to it, it seems unfair. Then 2022 comes along and a lot of these private companies that had these high flying valuations have been slashed. You know they're not worth nearly as much as they were two years ago. And so what looked to be just a steadily rising current finally we saw the actual downside risk in those things. And so I don't think it's super attractive asset class to begin with simply because you can't trade them either. You know if you owned a share of SpaceX or OpenAI or whatever there are very few platforms for you to be able to trade it.

So if things do go wrong you don't really have an out. And not only that but most of these startup companies don't want you to own their shares. They want to purposely keep their cap table clean so to speak and they don't want everyday people just to be on it and saying, hey give me the financials I'm a shareholder I need some information. So the startups own the whole trading ecosystem basically if they don't want you to trade your shares, they can make sure that you can't. So I know it's an alluring place and everyone thinks it's very exciting and it's private equity and venture capital. But I think there are a whole lot of issues there that sort of everyday people should be, I don't think -- well they shouldn't be thankful that they're not allowed to do it, but they should be, I don't think it's as big of an opportunity that they're missing out as maybe it's portrayed.

Hampton: Well a lot of good tips that you've given us thank you for coming to the table Jack and sharing your insights.

Shannon: Thank you. Always happy to be here.

Hampton: That wraps up this week’s episode. Thanks for listening. If you enjoy hearing market trends and analyst insights on our podcast, feel free to leave a five-star review on Apple Podcasts. It will help others find us. Thanks to senior video producer, Jake VanKersen, associate multimedia editor, Jessica Bebel, and Margaret Giles. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.