A year to remember for stock-market debutantes

For some investors, 1999 could be considered the year of the initial public offering.

More than 500 businesses offered stock for the first time on various US exchanges this year. Those stocks rose an average of 66.6 percent during the first day of trading.

Such startling gains can quickly conjure up images of instant riches, but knowing which IPOs to buy requires much research and remains a risky proposition. Studies have shown that IPOs have underperformed the stock market in general year after year.

But for investors who land the right company - say the next Microsoft - the long-term rewards can be substantial.

In fact, many regular mutual funds, especially small-cap growth funds, often buy shares of IPOs in hopes of picking a long-term winner.

Unfortunately, many IPOs go from riches to rags. For every Microsoft, there are probably nine or 10 Boston Chickens - IPOs that start on a path to glory only to wind up on the bottom of the food chain. (Boston Chicken, opened to major market hype and soaring profits in 1993. It later became Boston Market after sales lagged, filed for bankruptcy last year, and is now being sold to McDonald's.)

IPOs have generally only been available to institutional investors or the well-connected. Small investors have usually only been able to buy into them after the initial price spurt has settled back into a much smaller gain.

"As a long-term proposition, buying and holding a big basket of IPOs hasn't been all that lucrative...." says Scott Cooley, a senior analyst for mutual-fund tracker Morningstar, in Chicago. "People seem to get interested in them for all the wrong reasons.

"They see the hot returns and they want to pile in," he says. "[But] I'm not sure people really understand how volatile it is. It's red hot right now, but a year from now it might be ice cold."

So if the idea of buying into an IPO gives you chills, you can let a couple of specialty mutual funds take the heat for you.

One of them, Renaissance Capital's IPO Plus Aftermarket Fund (888-476-3863, www.ipohome.com) marked its two-year anniversary this month. And they certainly have had reason to celebrate.

Up 99.7 percent through Dec. 17, the fund is riding the wave of wildly popular Internet and technology stocks. Among the fund's top holdings: E*Trade Group Inc., E-Tek Dynamics, and Quest software.

"To the extent that the IPO calendar has been dominated by Internet companies, the proportion of Internet and technology stocks in our portfolio is high," says fund co-manager Linda Killian.

She's quick to point out, however, that is not just high-tech. She lists biotech companies Genentech and Invitrogen; broadcasters Fox, Radio One, and Spanish Broadcasting; and cookiemaker Keebler Foods among its holdings. The take-off in IPOs has helped the fund to more than double in size this year, holding $50 million in assets.

Renaissance Capital, based in Greenwich, Conn., has been providing research on initial public offerings since 1992, primarily to institutional investors. Ms. Killian says the fund has bought into more than 100 IPOs this year. About 25 percent of the portfolio was purchased at the initial offering price, the rest after the stock was made available to all investors - commonly referred to by IPO pros as the "after-market."

Another IPO fund grabbing investors' attention carries the name of prominent investment bank Hambrecht & Quist. The bank has taken many hot IPOs public over the years, including Genentech, Apple, and Netscape.

The H&Q IPO & Emerging Company Fund (877-613-7975, www.funds.hq.com) is up more than 30 percent since its inception Oct. 28. Until that time, H&Q only dealt with the "high-net-worth individuals," says the fund's manager, David Krimm.

The fund, he says "is offering both access to IPOs and diversification within that sector of the market to people who couldn't do that on their own."

The bank's reputation has drawn the attention of investors. The fund now holds more than $400 million in assets, says Krimm.

But fund analysts are wary of the hype.

"H&Q has a ton of expertise in the [IPO] area, but the twist is that they are not managing the fund, they have contracted with a subadviser - Symphony Asset Management - to manage the money," says Mr. Cooley. "So while it has the H&Q label on it, the shareholders are not going to benefit from that terrific H&Q expertise in evaluating emerging companies because H&Q is not picking the stocks."

Much like Renaissance Capital's IPO fund, the H&Q IPO fund has bought into 100 IPOs this year with about a quarter of the purchases at the offering price.

What's different, though, is that the fund will close to new investors Dec. 30.

Cooley says the move is smart in that it will "attract a lot of money into the fund at the last second. But when the IPO market goes cold, as it does from time to time, a lot of that money is going to flow right back out."

(c) Copyright 1999. The Christian Science Publishing Society