By SARAH MORGAN
Psst: Want to get in on the next Google?> The initial public offering market just keeps getting hotter last week, LinkedIn joined Skype on the list of big names expected to go public this year but small investors are often shut out of the action. The fund industry thinks it has the next best thing: Three mutual funds that specialize in IPO investments. Are they worth a look?
Investing early in a growing company can certainly pay off, but it's a risky bet. Many newly public companies, even ones that see an early "pop," underperform over the long term, says Bill Buhr, an IPO strategist with Morningstar. With the pace of deals picking up, a broad IPO vehicle could outperform in the short term, but investors should be aware that there's a wide range of performance among individual deals, Buhr says. A strategy that shorts some "junky" deals could have potential if done right, he says. An IPO fund also runs the risk of becoming highly concentrated in whatever sector is "hot" at the moment, Buhr says. For example, nearly 30% of IPOs issued in the U.S. last year were for China-based companies.
There are three IPO-specific funds on the market, each with a different approach. The oldest, Renaissance Capital's $10.9 million IPO Plus Fund,
Because newly public firms are often small, the best benchmark for IPO Plus is a mid-cap growth index, according to fund-tracker Morningstar, and here the fund has lagged over the long- and short-term. Over the past 10 years, it lost 4.5%, while the mid-cap category gained 3%, and over the past 12 months it rose 16.4% compared to a 30.3% for the category. "It's been a very tough 10 years for the IPO market, on average," says Linda Killian, the fund's portfolio manager. "When IPOs do well, we do well," and IPOs began to pick up mid-year last year, she says. The fund is also expensive, charging 2.47% in expenses, compared to the average mid-cap growth fund's 1.45%. About 1.5% of that is a management fee, which reflects the proprietary research Renaissance does on every deal in its portfolio, Killian says.
The $15.6 million First Trust US IPO Index Fund (FPX)
The newest entrant on the market offers a new twist: It bets against IPOs, along with investing in them. The $14.7 million Direxion Long/Short Global IPO Fund,
Corrections & Amplifications
The original version of this story misstated the expense ratio for the SPDR S&P 500.