IPO Fund
The reason a fund complex launches a new fund is to try to attract more assets. I’m okay with that. But sometimes a fund complex takes it too far. Take, for example, the new Van Kampen IPOX 30 Index Portfolio.
IPOX allows the investor access to recent large IPOs. But there are significant problems with the fund — drawbacks that make the fund uninvestible. The fund charges up to a 4.95% sales load!
There is no secondary market for the shares. The company states that they are creating one and that you can deal the shares back to the company.
In addition, despite their claims that their strategy will produce market beating returns, I have significant doubts because (1) IPOs have traditionally underperformed (see Buying IPOs Is a Loser’s Game) and (2) according to a recent Morningstar study, high expenses mean low returns.
If you want the excitement of IPOs feel free to play around with this fund but if instead, you would like to increase your net worth, I would stay away.
Josef Schuster said,
November 5, 2005 @ 5:13 am
11/4/2005: IPOX Indexes make new multi-year highs
Since launch of the IPOX-30 Van Kampen sponsored product on July 20th, the IPOX-30 has outperformed the S&P 500 by 650 basis points or the Russell 2000 by 900 basis points. Over a 15-year horizon, the IPOX-30 has beaten the Nasdaq-100, only at 60 percent of its standard deviation.
The “IPO underperformance story” is outdated, all of the academic IPO research uses an equally-weighted sample set-up in event time. Any top US business school academic will verify this.
The IPOX Indexes are the first product addressing one of the most pervasive empirical anomalies in Finance: the dispersion in long-run IPO returns. i.e. while many companies go public (annually around $140bn of market cap is being created through IPO and spin-off activity annually), exposure to only few can add substiantial diversification benefits and alpha to a portfolio.
The IPOX-30 Index is an index of the top 30 companies in the IPOX Composite Index ranked quarterly by market capitalization. The IPOX Composite captures a (screened) universe of US IPOs and spin-offs. After entering the IPOX-Composite Index on the 7th trading day, companies remain in the IPOX Composite until their 1000th trading day anniversary on the stock markets. Current companies include GOOG, CME, DEX, WYNN, PA, CE, PRU, PFG, WC, WLP etc.
This allows for a buy-and-hold exposure to the largest and best performing IPOs during the past four years, a totally systematic and disciplined approach to add alpha to a portfolio.
Update your thoughts on IPOs: think IPOX
For more info, see www.ipoxschuster.com and discuss with josef@ipoxschuster.com
Brian said,
November 5, 2005 @ 12:16 pm
I’m flattered to have the founder of IPOX Schuster commenting on my blog. But that doesn’t change my opinion. You have an obvious economic interest in pumping the product and I think we should all keep this in mind when reading your comment.
You claim that your fund has had amazing results for four months. Well, congratulations, but it takes more than four months to establish a record. Four months of performance is a result of randomness rather than effective strategy. It’s akin to flipping a coin and getting four tails in a row.
Also, you claim the strategy has worked for 15 years. I would bet that’s the reason that the fund was launched in the first place. Let’s follow the steps of launching a new, trendy fund:
Do some data mining. What is a strategy that has worked for 5, 10, 15 years? Buy at the IPO and hold for one year? No…Let’s try selling on the 1000th day? Yes! Great, we have a new marketing ploy. If you torture the data long enough, you will find a strategy that works.
(It seems that your data mining has also come up with IPOs with $50 million or more in sales have also outperformed. Yet, you use $50 million in market cap as a limit. Is this a mistake with the article (http://ipoxschuster.bizatomic.net/ipox_on_marketwatch.pdf) or with your process?)
Also, you only compare your long-term returns/risk to the Nasdaq-100. What do your returns/risk look like compared to other indeces? Do you have results after expenses/loads? Do you have perfomance figures without including GOOG? Do you have return information for IPOX-100 and IPOX-composite compared to other indeces over the long-run?
In any event, you may be able to slice and dice indeces to come up with a segment that outperforms. But I will remain skeptical.
Thank you for your comments. For those people who think that you are going to beat the market and take the plunge, I hope you create enough alpha to cover the sales load of 4.95%.
TreeFrog said,
February 21, 2006 @ 10:50 pm
Terrific Blog you have. Peace Out.
TreeFrog
JiggyWittit said,
March 6, 2006 @ 4:25 am
Kewl blog you got goin on up here.
Peace, JiggyWittit