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Dear Dagen: IPO Shares Make Good Bait Though They're Not Always Good Investments

Fidelity's deal with Friedman Billings Ramsey seems to be a mixed blessing for its brokerage customers.

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Last week,


trumpeted an agreement that gives its brokerage customers access to initial public offerings and other securities underwritten by investment banking boutique

Friedman Billings Ramsey



In a world where retail investors seem desperate to get into any IPO, the deal seems like a coup for Fidelity. But on closer inspection, the arrangement may be a mixed blessing for Fidelity customers.

Since the beginning of 1998, the majority of IPOs underwritten by Friedman Billings Ramsey haven't done well. In fact, 10 of the 14 IPOs either lead-managed or co-managed by the Arlington, Va.-based firm are trading below their offering prices.

Nobody, whether it's the investor, the underwriter or the company, wants or expects an IPO to fall below its offering price. But since the start of 1998, it's happened more often than not with FBR.

Of the 718 IPOs that have hit the market since the start of 1998, 390 -- or 54.3% -- are trading below their offering prices, according to


, an analytical firm that tracks IPOs. For FBR, the percentage is 71.4%. (See a previous

examination of FBR's underwriting record.)

For the first quarter of 1998, FBR ranked No. 1 in IPO underwriting in terms of dollars raised, according to

Thomson Financial Securities Data

. FBR was lead manager on six IPOs last year, all of which are now trading below their IPO prices.

But in 1999, FBR has yet to lead-manage one IPO, according to Securities Data. The lead manager of a deal is the one that truly controls the allocation of shares and gets the bulk of them. There's no shame in serving as a co-manager, but the lead manager is the one in command.

The firm has been co-manager on five IPOs in 1999. Among IPO underwriters this year, FBR ranks 41 out of 152 in terms of dollars raised.

Funny. That doesn't appear in Fidelity's press release.

Friedman Billings Ramsey points out that the firm, in part, specializes in real estate investment trusts, a sector that has done poorly over the past couple of years. "Five of the 10 IPOs that are beneath their offering price are REITs," writes spokesman David Allan in an email.

A REIT, or real estate investment trust, owns and manages a portfolio of real estate assets. Some own equity, or tangible property, like hotels and hospitals; others own mortgages or mortgage securities. Equity REITs, on average, are down 18.3% from the end of 1997 through Monday, according to Glenn Doggett, director of data analysis at

SNL Securities

in Charlottesville, Va. Mortgage-backed securities REITs are down 40.3% over the same period.

In the past, the aftermarket performance of FBR's offerings has been better, says spokesman Allan. From the beginning of 1996 through June 30, 1998, FBR ranked No. 7 among lead managers (for investment banks with at least 20 deals) in terms of IPO aftermarket performance, with the average deal up 46.4%, says Allan, quoting data from CommScan.

And FBR ranked No. 7 in dollar volume of lead underwritings for the two-year period from the beginning of 1997 through 1998.

Emanuel Friedman, chairman and chief executive officer of FBR, notes that the firm has filed to lead-manage two upcoming IPOs,


, a provider of email marketing services, and

Atlas Pipeline Partners

, a natural-gas pipeline operator. Also, the firm was the lead manager on a secondary offering for

Key Energy Services

(KEG) - Get Free Report

, an oil-services company.

Earlier this year, Friedman Billings started its own online underwriting unit,

, which has its own customers. Now the firm has inked a deal with Fidelity. So if you are an client, you're now competing with Fidelity's army of customers -- it boasts 2.8 million online retail accounts -- for a limited number of IPO shares.

Will there be enough to go around? "We're hoping to allocate a fair amount to both channels," adds Friedman.

Bob Mazzarella, president of

Fidelity Brokerage Services

, stresses that Friedman Billings Ramsey is just one supplier of products to Fidelity customers. He notes that

Lehman Brothers


is the "cornerstone relationship" for Fidelity among suppliers of securities offerings. The firm also has an alliance with

W.R. Hambrecht & Co.

, and it may be announcing one or two more deals in the future.

Mazzarella also emphasizes that Fidelity did examine FBR's track record. Although some areas like REITs did pull down the firm's offerings somewhat, "we feel the quality is good," he adds. "They are very capable of bringing out some very strong products."

But Mazzarella does point out the firm will keep its eye on this alliance or any other for that matter. "If we find that the quality is not up to our standards and the relationship isn't working, then we will back away from it," he asserts. "I am not talking deal by deal. I am talking about the overall breadth of the relationship."

Mazzarella underscores that he is "not going into this with a negative view."

But investors -- as always -- would be wise to exercise some skepticism when looking at IPOs, whether or not these offerings are coming through Fidelity.

In the battle to attract online customers, IPOs have become the latest bait. And if investors believe that in the long run they'll benefit from getting their hands on


IPO, they are sorely mistaken.

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Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.