The initial public offering market has dried up over the past two years, and the reputation of the industry has been tarnished by questions about IPO laddering schemes and the conflict of interest of sell-side analysts. But one small mutual fund is registering signs of improvement for the going-public market - the $20 million IPO Plus Fund, run by Renaissance Capital of Greenwich, Conn.

In what was an emerging category for mutual funds two years ago, the IPO Plus Fund now finds itself alone. Its recent performance has improved, but the fund continues to struggle. Year to date through June 13, the IPO Plus Fund was down 8.9%, according to Morningstar of Chicago. During the same time period, the Russell 2000 Index, against which it is benchmarked, posted a 6.2% loss.

The fund's 2002 year-to-date performance is a substantial improvement over 2001, however. That year, the fund posted the worst results in its history, declining losing 51.9% following a decline of 41.5% in 2000. So the fund has a lot of ground to recover before it can return anywhere near its heyday of 1999, when it soared 115%. And, of course, it may be premature to celebrate these year-to-date figures, as it remains difficult to tell if the initial public offering market is on the cusp of a revival or just riding a temporary upswing.

Paul Herbert, an analyst with Morningstar, does not believe that new issues are about to stage a comeback and notes that since its peak in March 2000, the fund has lost 80% of its value. In fact, three other mutual funds that focused primarily on IPOs were recently closed down, Herbert said.

San Francisco-based 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 a second fund, the IPO and New Era Fund, that year. When both funds were liquidated last September, the OpenFund had $9.9 million in assets and the IPO and New Era Fund had just $1.4 million in assets.

A third IPO mutual fund that recently was liquidated is the JPMorgan H&Q IPO Emerging Companies Fund, which hit the market in 1999. "It took in a ton of new money right away and closed to new investors within two months. It was borne of the idea that IPOs were doing really well," Herbert said.

But its performance went south, the analyst said, and in 2001, the fund's mandate was changed to include more seasoned issues. Ultimately, the fund was closed late last year.

In 1998, however, fund companies watching the IPO Plus Fund were eager to jump onto the IPO bandwagon. That year, the fund was up 18.3%, far better than the 2.6% loss posted by the Russell 2000. In 1999, the IPO Plus Fund was up an astounding 115% when the Russell 2000 only gained 21.3%.

Some mutual fund portfolio managers had been buying new issues, but having a fund dedicated primarily to newly minted stocks was a groundbreaking concept. After all, mutual funds are considered safe investments for the most part, and the new-issues market is known for its high risk. But the wealth creation in the 1990s emboldened many managers to test new financial concepts.

Sensing a shift in investor attitudes, Renaissance Capital, which has been following IPOs since 1991, was the first to offer investors an alternate route to IPO allocations, which heretofore had typically been doled out only to underwriters' best customers. Renaissance launched the IPO Plus Fund in 1997.

The firm's intention was "to give individual investors some access to IPOs that they wouldn't ordinarily have," said Linda Killian, portfolio manager.

Slim Pickings

However, because the IPO market has been very slow, the fund buys in both the IPO and the aftermarket to fill out its positions, Killian said. In fact, only 20% to 25% of the fund's shares are bought at their offering, and the mandate of the fund allows it to own holdings that have been on the market for as long as 10 years.

Broadened Mandate

Most of the fund's holdings are stocks that have been on the market for the past two years. "I would say you never get as much [IPO stock allocation] as you want, but there's been a couple of deals that have had to price very cheaply, and we were willing to step up to the plate and [acquire] a large allocation," Killian added.

Killian said the firm has also employed defensive measures during difficult market conditions. "We tend to have more cash on hand to reduce volatility of the fund and we maintain [some] short positions," she said. One stock the fund shorted was Edison Schools, which declined more than 88% this year on accounting scandal charges. Additionally, the fund has participated in several secondary offerings, which have outpaced IPOs by volume this year.

Currently, the IPO Plus Fund's largest positions are in eye-care product provider Alcon and Alliance Data Systems, both of which went public this year.

Its biggest success has been with Coach, which went public in October 2000. Killian sensed a revival in retail stocks and bought the leather goods firm in the aftermarket in 2001, when it returned 35.6%.

Killian also sensed opportunity in the veterinary healthcare company VCA Antech and bought it as an initial public offering last November. "No one wanted it, but it went right up," Killian said. Since its IPO, the stock has returned 15.9%.

Despite these victories, Renaissance can't ignore the fund's negative performance figures dating back to December 2000. Neither could Morningstar, which has given the fund its lowest ranking of just one star.

Besides market conditions impacting the fund's performance, the fact that it's heavily concentrated in top holdings has really hurt it, Herbert noted. The IPO Plus Fund has 40% of its assets in its top 10 holdings. This has added to the fund's volatility, he said. "It's just the kind of extreme performance that most investors really can't handle."

"I don't think the idea is wrong, because there are funds that buy IPOs and do well. It's certainly not the case that these two ideas [mutual funds and IPOs] don't work together," Herbert said. "They're not necessarily contradictory. But as a fund that only owns IPOs, time has shown so far that can be dangerous."

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