Newspaper article St Louis Post-Dispatch (MO)

Initial Success Mutual Funds Snap Up New Issues to Cash in on Gains

Newspaper article St Louis Post-Dispatch (MO)

Initial Success Mutual Funds Snap Up New Issues to Cash in on Gains

Article excerpt

Entrepreneurs start innovative companies, take them public and become millionaires overnight. And everyone seems eager to get in on the action - leading to great demand for shares in newly public companies.

Mutual funds are no exception, says Morningstar Inc., the Chicago fund tracking firm. To spot funds that were heavily involved in initial public offerings, Morningstar in early April studied the most recent portfolios of more than 2,000 U.S. diversified equity funds.

It found that more than 80 percent of the funds had at least 10 percent of their assets invested in issues that had come to market after Jan. 1, 1995. A handful of funds had more than a third of their money in these new issues.

What is more, the figures are probably understated, said Susan Paluch, the managing editor of Morningstar Investor and the study's director. Funds are required to disclose their portfolio holdings only twice a year, so the data omit any issues bought and sold in the interim.

Quickly selling new issues to take advantage of their early bounce is known as flipping, a rather common practice that can have a profound effect on a small fund's returns, in particular.

The average new issue rises 16.3 percent in the first day of trading, according to a 1988 study by Ibbotson Sindelar Ritter.

Mutual fund managers often are not candid about flipping or about their holdings of fledgling stocks. Perhaps that is because most managers preach fundamental research and long holding periods, Paluch surmised.

New offerings tend to come to market as an industry sector peaks. Technology companies, especially those related in any way to the Internet, account for most new issues these days.

So funds with more than 10 percent of their assets in new issues have more than 30 percent of their assets in technology stocks, on average. These funds could get a big jolt if there is a downturn in technology stocks, as that sector's dip in the first quarter showed. …

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