By John Collett
Despite the Australian sharemarket being dragged down by the banks and miners, the market's newbie listings are flying high.
Initial public offerings (IPOs) are generally performing much more strongly than the broader market.
Some of the best investment options have been government privatisations.
The share prices of the 93 floats of 2015 were up 23 per cent by the end of last year, according to figures from financial data provider Dealogic and analysed by OnMarket BookBuilds.
By comparison, the S&P/ASX 200 index lost 3 per cent during 2015.
The strong performances of IPOs have continued into this year, says Ben Bucknell, chief executive of OnMarket BookBuilds, a free app that gives small investors access to IPOs.
"Of the 13 IPOs on the Australian sharemarket during the first quarter of this year, first-day returns averaged 9.2 per cent," he says.
The initial "stag" profit was not sustained, with the 13 IPOs returning an average of 1.3 per cent by March 31, but that is still much better than the S&P/ASX 200 index, which lost 5.4 per cent.
Many companies listing on the sharemarket are from the technology, health care and financial sectors, with miners notably absent as commodity prices have fallen.
But don't get too taken away by the prospect of making a fortune from market newbies.
The risks of IPOs are greater than for companies that have a longer life as a listed company.
There are the successes, such as Chinese technology company Wonhe Multimedia Commerce, which floated in December last year and whose share price has more than doubled.
Then there is Dick Smith, the electronics retailer that recently went into voluntary administration after a $520 million float by its private equity owners in December 2013.
Elio D'Amato, the director of research at share analytical firm Lincoln Indicators, does not usually recommend IPOs.
The float prospectus is mostly a marketing document, he says.
He prefers to look at the financial health of a company after it has listed. Otherwise it can be a "bit of a hit and hope situation".
Steve Black, portfolio manager of the Pengana Emerging Companies Fund, says this IPO cycle has been strong but he remains cautious.
He says directors of these newly listed companies are schooled by their advisers to under-promise and over-deliver on prospectus forecasts. As a consequence their share prices can do well, at least over the short term.
"Our concerns centre more on the sustainability of returns beyond the prospectus period," Black says.
"Myer Holdings and, more recently, Dick Smith provide good illustrations of why we remain wary."
Myer listed in October 2009 with an issue price of $4.10 and delivered on prospectus forecasts. But the department store chain subsequently reported five consecutive years of profit declines and its shares are trading at about $1.10.
Black says there needs to be substantial upside from a float, over the longer term, to compensate for the extra risk's borne by investors in a newly listed company.
Julian Beaumont, the investment director at Bennelong Australian Equity Partners, says he looks for highly profitable businesses that provide highly desired or essential products and services.
The business needs to have experienced and driven management, he says.
"The problem [with IPOs] is that you often have less understanding of the company, and less financial history with which to judge the company's prospects," he says.
"It is important to consider the vendors' motivations when considering an IPO.
"We are more interested in IPOs where the company is raising money to enable investment in growth, rather than those where the owners are selling to simply line their own pockets," Beaumont says.
Potential investors in IPOs have to remember that vendors know their company better than anyone else and have control over the timing of the IPO, he says.
Mark Arnold, the chief investment officer at fund manager Hyperion, says he is cautious on IPOs given the information advantage of vendors over investors.
"Although the prospectus does provide historical information on the company, the detail provided can be less than we would normally consider in making an investment," he says.
"Vendors are usually careful with the timing of an IPO to maximise their profits.
"It is also likely the best floats are well and truly oversubscribed and will result in all investors' allocations being heavily scaled back."
Beaumont says some of the best floats have been the government privatisations.
These floats tend to be "priced attractively" to give investors, who are voters, a profitable experience, he says.
That has led to investors doing very well from privatisations such as the Commonwealth Bank of Australia, biotechnology group CSL and, more recently, the Medibank float. Medibank is Australia's largest private health fund.
Medibank Private floated in late 2014 with retail investors paying $2 a share. Its shares are trading at about $3.
Government enterprises can often be run far more efficiently in private hands with the efficiency gains falling to shareholders, Beaumont says.
Western Power could be one of the biggest floats this year. If the West Australian government decides to privatise the business, which maintains and operates the electricity network in the south-west of the state, it could be worth $10 billion.
Another potential float is that of NSW government-owned Endeavour Energy, which could raise $4 billion.
Then there is State Plus, which provides financial planning services to NSW public servants, former public servants and their families.
State Plus was until recently known as State Super Financial Services and is owned by NSW's SAS Trustee Corporation. An IPO could raise more than $1 billion.
Twitter: @jcollett_money