At one time, at the height of the raging bull market, it seemed a wonderful idea. Offer individual investors a chance to buy shares of funds that bought IPOs, which are usually closed to most individual investors.
Several companies offered such funds. Now the category is down to one struggling fund.
Will IPO Plus, a fund run by Renaissance Capital, end up as the "Last of the Mohegans?" Recent history is not on its side.
Roughly three other mutual funds that focused primarily on initial public offerings were taken off the map. Metamarkets.com, formerly of San Francisco, launched its OpenFund in August 1999 with just $5 million in assets. By March of 2000 it had grown to $55 million and the firm launched its second fund, the IPO and New Era Fund, that year. By September 2001, both had been liquidated – the OpenFund with just $9.9 million and the second holding with just $1.4 million in assets.
An Instant Hit
According to Morningstar, when these IPOs for everyone funds began in the 1990s they were instantly popular.
"They took in a ton of new money right away and closed to new investors within two months. It was born of the idea that IPOs were doing really well," said Paul Herbert, a Morningstar analyst.
But ultimately performance went south, the analyst said. The wealth creation from the last decade spawned a plethora of new financial concepts. And while many mutual funds do buy into new issues, having a fund dedicated primarily to these newly minted stocks was a groundbreaking concept. However, the bear market steadily dried up the public offerings market over the last two years.
As a result, IPO Plus now finds itself alone in a once-emerging category. And its recent performance has been dismal. For the 12 months through the end of May, it was down some 32 percent. For the three-year period through the end of May, it recorded an annual return of minus 24.4 percent.
Since there are no other funds to compare itself with – the company could now run ads boasting that it is number one in its category! – the fund's only comparison is with the Russell 2000 index. The comparison is ugly. For the 12 month period, the Russell is almost unchanged, but for the same three-year period the Russell is up 15.67 percent, which means it beat IPO Plus by 40 percent over three years!
This is a long way from the fund's glory days of 1999. That year, when tech funds were sizzling, this fund returned over 100 percent. This accentuates the fund's recent egregious numbers. Despite a triple digit return three years ago, the fund's three-year numbers are still bad no matter how one measures them.
Nevertheless, officials of the Connecticut-based Renaissance Capital still believe this fund, which is down to a measly $20 million, is still a good idea.
"The thesis is to attempt to give individual investors some access to IPOs, some access they ordinarily wouldn't have," according to Linda Killian, a Renaissance portfolio manager. The fund buys in both the IPO and in the aftermarket to fill out positions, said Killian. On average, 20 to 25 percent of actual shares are bought at the offering. Renaissance stuck to the fundamentals of the market it has known for more than a decade. Its mandate allows the fund to hold positions for as long as 10 years.
Performance Holdings
Currently, the IPO Plus fund's largest positions are in eye-care product provider Alcon Inc. (NYSE:ACL) and Alliance Data Systems (NYSE:ADS), both of which went public this year. Its biggest success is with leather goods manufacturer Coach Inc. (NYSE: COH), which went public in October 2000. Most of its offerings are with companies that have gone public within the last two years.
"I would say you never get as much [stock allocation] as you want, but there's been a couple of deals that have had to price very cheaply, and we were willing to step up to the plate and got a large allocation," Killian said.
VCA Antech Inc. (NNM:WOOF) is one such example. Much in the way the firm sensed a revival in retail stocks and bought Coach in the aftermarket, it sensed opportunity in the veterinary health care company, and Renaissance bought into the IPO. "No one wanted it, but then it went right back up again," Killian said. Despite these victories, Renaissance can't ignore the fund's negative performance figures that date back to December 2000. Neither can Morningstar, which gave it its lowest ranking – one star.
Defensive
Killian said the firm has taken on defensive measures under such difficult market conditions. "We tend to have more cash on hand, and we've tried to reduce volatility of the fund by having the cash and we maintain a certain short position," she said. Additionally, the fund has participated in several secondary offerings, which have outpaced IPOs by volume this year.
"Given a certain level of risk, what we've been through as a fund is a once-in-a-generation blowup," Killian said. "But that doesn't undermine our basic argument – when the market is better, you can make a lot of money, and that shows in our profile."
Besides market conditions impacting the fund, the fact that it's heavily concentrated in the top holdings has really hurt it, according to Morningstar's Herbert.
"Forty percent in 10 names is still quite a concentrated mutual fund," he said. "It's just the kind of extreme performance that most investors really can't handle."
At $20 million in assets it is unlikely this fund is making money for Renaissance. Unless the market perks up and fast, this fund could find itself going the same way as the rest of its category.
Colleen Marie O'Connor is a senior editor at the IPO Reporter, a sister publication of Traders Magazine.
