The best performing sector in the sharemarket. It's not what you think

Posted by Andrew Main 20 July 2016 @ 12:00AM

The best performing sector in the sharemarket. It's not what you think

New sharemarket floats in Australia enjoyed an average price increase of almost 34 per cent in the second quarter of 2016, according to new research from the IPO access portal OnMarket.

The OnMarket Second Quarter IPO Report, just published, notes that the 33.5 per cent increase compares with a mere 3.0 per cent rise in Australia‘s main sharemarket barometer, the S&P/ASX 200 Index.

The new IPO performance numbers also represent a sharp jump up from the first quarter, which never the less saw IPOs up 1.3 per cent over a period when the overall market index was down by 5.4 per cent.

In simple terms, IPOs at the moment are by far the best performing sector in the sharemarket.  And shares overall aren’t even running particularly hot , what with the high degree of global uncertainty out there.

So, what’s the secret?

While not every IPO goes up on Day One (see for instance Kogan, dropping 15 per cent on the first day because it coincided with worries about Brexit and our election), there are at least two elements of a new float’s pricing that are likely to accentuate the positive, as the song puts it.

One, in order to attract investors, the vendors and their agents have to make sure the offering is priced at a level where informed investors will see more upside than downside.

And two, listing shares means they acquire liquidity, going from being untradeable to tradeable. That inevitably makes them more attractive to buyers.

Other factors? It could be that there’s a turbo effect on the upside insofar as investors are chasing new floats because previous ones have gone well.

And there’s a bias to IT floats, with nine of the last 19 floats in Australia featuring  IT companies.

But that’s characteristic of any new float market: whether it’s gold, oil, healthcare or IT.  Just because a sector is flavour of the month doesn’t make it inherently any more risky.

In fact the average return from IT IPOs was actually lower in the quarter at 10.7 per cent, possibly because there are a lot of new players to choose from.

There’s a positive nuance in the fact that people who buy into new floats at the moment and who hold onto their shares do better than “stags” who flip their share allocation on listing day.  In this case, it’s 33.5 per cent against 24.5 per cent.

(That said, an entrepreneurial investor with a high tolerance for risk could outperform both categories by investing new float profits in further new floats.)

Contrary to recent criticisms that many companies coming to the market are not developed enough to stand the listing process, the current crop of offers are tending to list at a premium then rise from there.

They are not the “flash in the pan” that they are made out to be, although it is true that governance and share price performance don’t always correlate.

What’s perhaps best about the crop of figures from this year is that there haven’t been any whopping big IPOs to skew the results and dominate the headlines.

That’s the problem with the perception of IPOs: one bad big one such as Myer or Dick Smith gets a massive amount of negative publicity, leaving investors wondering why they should go near a new float even though the actual arithmetic is far more inviting, if less sensational.

The biggest new entrant in the last quarter was plumbing supplier Reliance Worldwide, code RWC, at $1.3 billion but most issues have raised between $50 million and $100 million.

So what are the probabilities of getting ahead?

Of the 21 companies that came onto the boards in the second quarter of 2016 , only five came on below their issue price.

That’s fair odds and meanwhile, there are always a few bolters on the upside. Abundant Produce, which produces vegetable seeds bred specially to survive in hostile environments, had a subscription price of 20 cents, came on at almost 60 cents and at last glance was at 90 cents. That’s a 350 per cent lift for original subscribers.

That’s not to say your next investment will net you 350 per cent.  But the so called “window” for IPOs, the period when it makes economic sense for vendors to come to the market, shows no sign of closing any time soon.

There are at least 11 new offerings waiting in the wings, seeking anything from $5 million to $77 million, and unless there’s a dramatic change in the market mood, there will be worthwhile profits coming the way of both institutional and retail investors prepared to put their money to work.