Swathes of businesses have come to the market over the last year as management teams have become increasingly relaxed with the state of the economy. Demand for equities has also picked up with retail investors becoming more comfortable about putting their money back into the stock market. However Savvides, manager of the JOHCM UK Dynamic fund, says investors should tread very carefully with IPOs as the majority of them are very over-priced.
“I never, ever, get excited about IPOs,” Savvides said. “There a number of reasons why we avoid them.”
“Firstly, they have limited history but what we are trying to do is to find hidden gems and value opportunities.”
“However, the majority of IPOs have been trawled over from all angles by analysts and newspapers. That means that, on the face of it, you get pretty high valuations and analyst forecasts always seem to be a bit ambitious. It is in no-one’s interest to have lowly valued IPOs.”
Savvides says that people should remember that the major risk, when it comes to investing, is the price you pay for an asset.
“I have only bought one IPO in the last year, in fact it might be the only one I have ever bought for the fund,” he said.
“For instance, you have had all these tech IPOs this year. I am not saying they are bad businesses, in fact many of them are very good, but that doesn’t mean they are a good investment. You have to remember you are just buying shares, not the company itself.”
There have been a number of IPO success stories, however.
For example, the privatisation of Royal Mail in October attracted a huge amount of investor interest. The stock floated at 330p and has since bounced to above 500p, though it was widely believed to be undervalued.
Performance of stock vs index since Oct 2013
Source: FE Analytics
Another example is Poundland, which floated in March. Its launch price was 300p, but it shares have jumped to 370p over the last month.
FE Trustnet recently highlighted that, according to research from Capita Asset Services, investors buying into UK companies’ initial public offerings (IPOs) see returns that on average beat the wider UK equities market in the short and medium-term.
Nevertheless, companies such as AO World and Pets at Home – which came to market with great fanfare – have both fallen below their launch price. Investors who bought Pets at Home and AO World after the first day of trading would have lost 7 per cent and 25 per cent, respectively.
Because of that, Savvides says that investors should – on the whole – take a step back.
“The IPO market can be very challenging as at the moment, there is a lot of demand for equities,” Savvides said.
“Last year, IPOs were priced better as that wasn’t as much money chasing equities. This year, however, a lot of people want exposure and it is squeezing out all the value. That’s why I don’t participate and I would, in general, be cautious on IPOs in general.”
As Savvides recently told FE Trustnet, he has a distinctive value approach where he looks for companies that are in or very close to, a position to pay a dividend but are disliked by the market due to recent share price decline.
He targets companies that are undergoing a period of change, be it either structural or within the management. For instance, he has recently bought commodity stocks such as Anglo-American and African Barrick Gold.
Savvides launched his £136m JOHCM UK Dynamic fund in June 2008.
According to FE Analytics, over that time his fund has been a top quartile performer in the IMA UK All Companies sector with returns of 110.4 per cent and has more than doubled the return of its FTSE All Share benchmark in the process.
Performance of fund vs sector and index since June 2008
Source: FE Analytics
It also boasts top quartile returns – and has beaten the index – over rolling one, three and five year periods having only underperformed in one calendar year since its launch, which was in the falling market of 2011 when it lost 8.61 per cent.
His fund has yield of 2.83 per cent and its clean share class has a total expense ratio of 1 per cent, though it does have a performance fee of 15 per cent if it outperforms its benchmark.
While Savvides has always tended to avoid the IPO market, he did buy shares in DX Group, the mail, courier and logistics company, when they floated in March.
“We do tend to wait longer until there is a period of share price disappointment,” he said.
“However, we did buy DX Group, though it itself is going through its restructuring stage. The private equity group Candover had been forced to hand over a large part of its stake in the business so DX has come to the market a lot earlier than expected.”
Because of that, the manager says that the company was lowly valued but he also liked the stock as its forecasted one year forward dividend yield is 5 per cent.
The stock’s launch price was 100p and those shares have jumped to close to 130p. However, as the graph below shows, investors who bought the DX Group the day after it IPO’d would have actually lost money.
Performance of stock since Mar 2014
Source: FE Analytics
Savvides’ fellow FE Alpha Manager Andrew Jackson, who runs the five crown rated Ecclesiastical UK Equity Growth fund, also bought DX Group when it floated.
He too thinks that while the quality of companies that have come to the market this year has generally been good, the majority of IPOs have been highly valued.
However, Jackson expects DX Group – which was the third largest AIM IPO by money raised since 2007 – to perform well over the long term.
