Saturday Screen: Funds That Buy IPOs

Maybe the only thing harder than getting your hands on hot IPOs at their offering price is figuring out which mutual funds invest in them.

Online screening tools are more likely to turn up a fund manager's height than his or her taste for IPOs, because funds closely guard their portfolio information. This week's Saturday Screen humbly tries to end the mystery -- or at least shed some light on the murky subject -- for mutual fund investors who want a piece of the IPO pie.

Our pals at Morningstar sorted all stock funds, looking for those with the highest percentage of assets invested in companies that went public in the last 12 months. As you might imagine, small-cap and tech funds are at the top of the resulting list.

Risky Internet fund (ATCHX Quote)Amerindo Technology was way ahead of the pack with more than half of its assets in recent IPOs.

Here are the top 10:

IPO-Heavy Funds Mutual funds with the highest percentage of assets in stocks that have gone public in the past 12 months.*
Fund	Assets in Recent IPOs	Top 3 IPO Holdings
(ATCHX Quote)Amerindo Technology	53.8%	Ariba (ARBA Quote), Akamai Technologies (AKAM Quote), HomeStore.com (HOMS Quote)
(WTSMX Quote)Westcore Small Cap Growth	47.9	Interwoven (IWOV Quote) Finisar(FNSR Quote); PE Corp. -- Celera Genomics (CRA Quote)
(ATEAX Quote)Atlas Emerging Growth	38.5	Braun Consulting (BRNC Quote) NetIQ (NTIQ Quote) Purchasepro.com(PPRO Quote)
(NSPAX Quote)Pilgrim Small Cap Opportunities**	31.9	Primus Knowledge Solutions (PKSI Quote) Mediaplex (MPLX Quote), Cysive (CYSV Quote)
(WWIFX Quote)WWW Internet	31.7	Airnet Communications (ANCC Quote) Vignette (VIGN Quote), Finisar (FNSR Quote)
(MFTAX Quote)Monument Telecommunications	31.6	Net2Phone (NTOP Quote), Proxicom (PXCM Quote), Liquid Audio (LQID Quote)
(HSYTX Quote)HomeState Year 2000	30.9	Mediaplex (MPLX Quote), Critical Path (CPTH Quote), Clarent (CLRN Quote)
(PBTCX Quote)PBHG Technology & Communications	30.6	Sycamore Networks (SCMR Quote), Juniper Networks (JNPR Quote), Ariba (ARBA Quote)
(FATAX Quote)First American Technology	30.5	DIGEX (DIGX Quote), Copper Mountain Networks (CMTN Quote), Stamps.com (STMP Quote)
(BEMGX Quote)Berger Mid-Cap Growth	29.6	Internap Network Services (INAP Quote), Akamai Technologies (AKAM Quote), Genentech (DNA Quote)
Source: Morningstar. Data as of most recent public portfolio, so holdings may have changed. *Since Jan. 31, 1999. **Will close to new investors Feb. 29.

Some names you know, some you don't. But all of these funds focused on smaller and/or technology stocks last year, which served them well. These 10 funds averaged a 164% return in 1999. Amerindo led the pack with a whopping 248.9% return and (ATEAX Quote)Atlas Emerging Growth was the only fund not in triple digits, with an oddly humble 42.7% rise.

Atlas Emerging Growth manager Jay Tracey also manages (OENAX Quote)Oppenheimer Enterprise, which would've ranked third with nearly 40% of the fund in recent IPOs. Enterprise didn't make the list because it's closed to new investors. Tracey, like many other managers, declined to comment for this story.

PBHG had three funds in the top 30, (PBHEX Quote)PBHG Select Equity, (PBLDX Quote)PBHG Limited, and (PBNOX Quote)PBHG New Opportunities. The second two are closed to new investors, which kept New Opportunities out of the fifth slot, despite having 35% of its assets in recent IPOs.

Other notable funds in the top 20 are (TIFQX Quote)Firsthand Technology Innovators, which is closed to new investors, and (RSEGX Quote)RS Emerging Growth, run by Morningstar Manager of the Year, Jim Callinan. Both funds have close to 30% of their assets in recent IPOs.

Curious about growth shop Janus? The top Janus fund on the list, excluding a small, sub-advised fund, is (JAVTX Quote)Venture, with 20% of its assets in recent IPOs. The $2.9 billion fund posted a 140% return in 1999.

Ironically, the (IPOSX Quote)IPO Plus Aftermarket fund, one of two that specializes in new offerings, didn't crack the top 30. Manager Kathy Smith blames old data. The Hambrecht & Quist IPO and Emerging Company fund doesn't make the list because it launched in November and isn't in Morningstar's database yet.

Before you draw too many conclusions from the list, keep in mind that Morningstar data reflect portfolio information from funds' most recent shareholder reports. Some funds' data are fresher than others, and funds that flip IPO shares -- that is, buy at the initial offering and sell soon afterward -- might not have many recent IPOs on their books. Also keep in mind that it's not clear whether the funds on this list bought their shares at the offering price or in the aftermarket.

Nevertheless, it's at least an intriguing first cut. These funds appear to be charting an aggressive course. Past studies have indicated that most IPOs are dicey long-term investments.

But the 1999 performance of these funds is a testament to how much a few hot IPOs can boost a fund's return, particularly a small fund's return. The funds in our screen average $410 million in assets, less than half the size of an average U.S. stock fund.

By comparison, the 10 largest stock funds have, on average, just 0.14% of their assets in recent IPOs. Mammoth funds, like the $100.8 billion (FMAGX Quote)Fidelity Magellan fund, might get more IPO shares because of their girth, but those shares can't boost returns like they would at a smaller fund.

Of course, there is a risk component to IPO investing -- a point that may be lost on many investors with visions of VA Linux Systems (LNUX Quote) and Foundry Networks (FDRY Quote) dancing through their heads. (The two rose 698% and 525%, respectively, on their first day of trading last year.)

But for every VA Linux, there are IPO bombs like 1-800 Flowers.com (FLWS Quote). The company's shares were priced at 21 at their Aug. 3 IPO and closed at 10 3/4 on Thursday. Remember the once-promising Boston Chicken? Anyone?

"IPOs are tough now because they're getting younger, newer, and riskier," says Bruce White, a portfolio manager with Clifford Associates, a Pasadena, Calif., private money manager. He says his firm rarely participates in IPOs, and when it does, it favors more solid businesses like UPS(UPS Quote), which was the largest U.S. IPO ever when it went public on Nov. 10.

For individual investors, getting a piece of an IPO can be difficult because institutions like funds tend to gobble up all available shares. But it's not impossible, as a recent Jim Cramer column points out.

Still, owning IPOs through a mutual fund offers several advantages, not the least of which are professional management and diversification. Both can moderate the IPO market's risk.

But IPOs shouldn't make up more than 5% to 10% of an investor's portfolio, says Bryan Olson, director of research at Charles Schwab's Center for Investment Research.

Whether you know it or not, your fund manager might be picking up more IPOs than ever.

(WTSMX Quote)Westcore Small Cap Growth manager John Karns says many friends and colleagues who run funds at other fund companies and who have never dabbled in the IPO market now feel they "have to" to keep up with peers.

"Fund managers are human. When they see those kinds of big returns they get excited too," says Schwab's Olson.