Are there are any mutual funds that specialize in initial public offerings? -- Josephine Francis
When you say IPO, most people's thoughts turn right to
. The stock of that Internet auction house has climbed 1,446% from its September offering price of 18. And no, that's not a misprint.
But if you look at the IPO market as a whole, the picture is not as breathtakingly glorious. For 379 domestic IPOs in 1998, the average percentage rise was 19.95% through the end of the year, according to research firm
. That is a far cry from the numbers many investors remember reading in the paper.
Returns of the
IPO Plus Aftermarket fund look more like the national average than the likes of a sizzling Internet stock. This fund, the only one I know of that invests exclusively in newly public companies, returned 18.4% last year and has climbed 10.4% in 1999, according to
When you compare the fund's performance to the
, its numbers look good. The Russell index returned -2.6% in 1998 and is up only 0.4% (price only) this year. However, the IPO fund's returns pale when compared to say an Internet-stock fund.
Munder NetNet, for example, was up 98% last year and has climbed 39.6% this year.
The IPO Plus Aftermarket fund was started around the end of 1997 by Greenwich, Conn.-based
, an institutional research firm opened by Kathleen Shelton Smith, Linda Killian and William Smith in 1991. The firm was founded on researching IPOs, and the three bring that expertise to running their only fund. The three managers buy newly public companies during the offering phase and in subsequent trading, called the aftermarket or the secondary market. Making purchases in the aftermarket allows the managers to build positions in a stock. "The key issue for us is to find the right positions in the aftermarket," says Kathleen Smith.
Not surprisingly, the IPO fund does have a large allocation to Internet stocks. About 40% of this tiny $11 million portfolio is in Internet-related stocks, says Kathleen Smith. They did buy eBay at its IPO, but they sold it at 50 when the stock met their valuation targets, she says. (The stock, now trading around 246, was off about 11% in early trading Thursday during a
you value an Internet IPO? "It's hard," she sighs. The managers set price targets for all their stocks, although they will adjust those targets if necessary. "When a stock is really high, we think it's best to dispose of it and move on." With Internet stocks, it's also difficult to get them on the offerings because the demand is so great, she adds.
In the non-Internet world, the IPO fund owns
Fox Entertainment Group
, which the managers bought on the offering in November and in the aftermarket. The managers also own shares of
, a spinoff from
. Those stocks are up 18.6% and 48.3%, respectively, from their offering prices.
(For the fund's top holdings, you can visit Renaissance's
Web site, which also includes reams of information about the IPO market.)
Smith admits a lot of people ask why the fund's returns are not paralleling the performance of eBay and its ilk. She says one reason is diversification. The fund currently owns about 25 stocks, although the managers are planning to grow that number because of a heavy IPO calendar. And the managers will get out of a stock if it hits their price cap.
But there may be a greater reason. The fund has a "narrow investment focus in an area that is very hard to assess in a narrow way," says Gail Bronson, a senior analyst in Palo Alto, Calif. for IPO Monitor. It is like "trying to evaluate all different modes of transportation as opposed to only cars," she says.
If you absolutely have to own IPOs and don't have the time or a way to buy them on your own, this fund might be an option for you. As Smith puts it, "If you have a life that does not involve day trading, the fund is very convenient."
That said, there are certainly other broader mutual funds that also buy IPOs. But that's another column altogether.
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