INSIGHTS

On June 28, 2012

To IPO or Not to IPO?

With the recent initial public offering (IPO) of Facebook stock, the IPO process is once again making headlines and this raises many questions such as, “Is the process fair?” Is the process flawed? Should retail investors look to get involved?” Pretty simple questions but the answers, if there are any, are not. We don’t plan on trying to solve or offer a solution for the IPO process, but would like to discuss the last question, “Should retail investors get involved?” In a nutshell, we think the average retail investor would be better served by sidestepping the process, but not the asset class.

There are many factors that can hinder an investor’s investment performance over time including taxes, fees and expenses, but one that we believe needs more attention is emotion; and unfortunately, emotions tend to run high during the IPO process. As visions of big returns begin dancing in investors’ heads they ponder thoughts like, “Can I get shares, how many shares will be offered, what will be the price range and, will the shares trade up or even double the first day?” In the end, some do trade up significantly the first day; unfortunately, some also trade down the first day, and some even trade down for a period and then bounce and vice versa. Clearly, this can be hard on investors and maybe there is a better way to play the IPO market than trying to get in on the primary offering.

Just like we wouldn’t recommend an investor pick one dividend stock, MLP or REIT (Real Estate Investment Trust) to place in their portfolio, we don’t think the best way to play the IPO market would be to try to add one hot offering. We do think that investors should look to get exposure to quality and dynamic growth companies and many times those are companies that have just gone through the IPO process. The good news is there are now indices from IPOX Schuster, LLC that track the IPO (and spinoff) markets both domestically and globally with some of those indices approaching eight years of live performance (went live 8/4/04). Since that launch (8/4/04 – 6/26/12) we show the IPOX 100 US Index has more than tripled the total return of the S&P 500 (127.80% compared to 40.75%). Clearly, those returns deserve attention and should let investors see that a basket of securities can be a very powerful way to play a theme or asset class.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at ~/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com