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June 30, 2002

The Last of the IPO Mohegans?

By Colleen Marie O'Connor

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  • The Last of the IPO Mohegans?

At one time, at the height of the raging bull market, it seemed a wonderful idea. Offer individual investors a chance to buy shares of funds that bought IPOs, which are usually closed to most individual investors.

Several companies offered such funds. Now the category is down to one struggling fund.

Will IPO Plus, a fund run by Renaissance Capital, end up as the "Last of the Mohegans?" Recent history is not on its side.

Roughly three other mutual funds that focused primarily on initial public offerings were taken off the map. Metamarkets.com, formerly of San Francisco, launched its OpenFund in August 1999 with just $5 million in assets. By March of 2000 it had grown to $55 million and the firm launched its second fund, the IPO and New Era Fund, that year. By September 2001, both had been liquidated - the OpenFund with just $9.9 million and the second holding with just $1.4 million in assets.

An Instant Hit

According to Morningstar, when these IPOs for everyone funds began in the 1990s they were instantly popular.

"They took in a ton of new money right away and closed to new investors within two months. It was born of the idea that IPOs were doing really well," said Paul Herbert, a Morningstar analyst.

But ultimately performance went south, the analyst said. The wealth creation from the last decade spawned a plethora of new financial concepts. And while many mutual funds do buy into new issues, having a fund dedicated primarily to these newly minted stocks was a groundbreaking concept. However, the bear market steadily dried up the public offerings market over the last two years.

As a result, IPO Plus now finds itself alone in a once-emerging category. And its recent performance has been dismal. For the 12 months through the end of May, it was down some 32 percent. For the three-year period through the end of May, it recorded an annual return of minus 24.4 percent.

Since there are no other funds to compare itself with - the company could now run ads boasting that it is number one in its category! - the fund's only comparison is with the Russell 2000 index. The comparison is ugly. For the 12 month period, the Russell is almost unchanged, but for the same three-year period the Russell is up 15.67 percent, which means it beat IPO Plus by 40 percent over three years!

This is a long way from the fund's glory days of 1999. That year, when tech funds were sizzling, this fund returned over 100 percent. This accentuates the fund's recent egregious numbers. Despite a triple digit return three years ago, the fund's three-year numbers are still bad no matter how one measures them.

Nevertheless, officials of the Connecticut-based Renaissance Capital still believe this fund, which is down to a measly $20 million, is still a good idea.