IPOs May Give Your Portfolios a Lift

10/09/2007 12:00 am EST

Focus:

Linda Killian

, IPO Plus Fund

Investors often have a difficult time trying to obtain information, as well as actually purchasing shares in initial public offerings, as most IPO shares are allotted to major institutions and prime individual customers.

That usually leaves the average individual investor out in the cold. And while these offerings can be risky–especially if the company doesn’t have a track record of earnings and revenues–they can offer investors an opportunity to enhance their long-term portfolio returns.

In her program, Linda Killian, a founder of Renaissance Capital, listed additional advantages that IPOs can bring to individual investors, including diversification into new industries and a low correlation with core equity holdings–particularly in the first year. (This study discusses the actual general underpricing of IPOs—Editor.)

She also explained that since companies tend to go public when their prospects are good, the IPO market reflects the most active sectors of the economy at any time, albeit also the “hyped-up” industries.

Ms. Killian, the author of the book, IPOs for Everyone, told her audience that IPO activity is once again picking up and that the current period is similar to the early 1970s when the IPO market dried up then slowly accelerated.

Selective IPOs can be great–although, often volatile–additions to your portfolios. But most individuals can gain access only to the hyped-up, overpriced IPOs or the second- or third-tier companies, which don’t tend to do as well as those brought to market from the major underwriters such as Goldman Sachs and JP Morgan. Unfortunately, the typical individual investor doesn’t have a hope of obtaining the IPO shares issued by these “big guns,” as they generally still are reserved for their biggest and most well-heeled clients.
 
Ms. Killian’s firm has set-up an aftermarket IPO mutual fund, targeted toward individual investors who have not been able to participate in this arena. Her company reviews upcoming IPOs, analyzing their fundamentals, governance, technicals, and valuation prospects.

The fund is called IPO Plus (IPOSX), and its largest holdings include Focus Media, Haynes, Google, and DynCorp. (The fund performed well in the late 1990s, but it has trailed the NASDAQ Composite Index and the Russell 2000 over the past five years, and its expense ratio is a high 2.5%—Editor.)

Killian also discussed several upcoming IPOs, including American Water Works, one of the largest water utility companies in the US; network storage company, BlueArc; marketer of loyalty programs, Affinion; and Virgin Mobile, the international communications company headed by Sir Richard Branson.

(Editor’s note: IPOs can be fun and interesting additions to your portfolio, but make sure you limit them to a small segment of your overall holdings, as they are very volatile!)

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