IPO Party Like It's 1999

September 06, 2006

STOXX rolls out IPO indexes in Europe, while ABN Amro launches new index certificates tied to the Schuster IPO index in Europe.

If imitation is the most sincere form of flattery, Joseph Schuster must be celebrating right now.

Schuster, the developer of the IPOX-Schuster IPO indexes, has spent the better part of the last half-decade preaching to the world about initial public offerings (IPOs). In his view - and it was a lonely view to have for a while - IPOs represent an entirely new asset class within equities, offering a different return profile and risk characteristics compared to other types of stocks. Schuster developed IPO indexes to track this performance, one of which has been turned into an exchange-traded fund (ETF) in the U.S. Slowly, more and more people have come to respect - or at least consider - his arguments.

This week, however, Dow Jones STOXX paid Schuster the highest complement, as it launched its own set of IPO indexes in the European market. The new Dow Jones STOXX IPO indexes track the performance of European IPOs over three different time durations - 3, 12 and 60 months.  In each case, IPOs are added to the index on the day after their initial offering, and stay in the index for the named duration.

"Initial Public Offerings are considered more and more as an asset class of its own and increasingly have gained investor attention," said Lars Hamich, managing director, STOXX Ltd. "The Dow Jones STOXX IPO Indexes offer flexible and investable tools to participate in the performance of this highly dynamic equity market segment from the first day a company is listed."

One key difference between the two sets of indexes is that Schuster's indexes add stocks on their seventh day of trading, rather than their first.  The difference may seem small, but it points to the key difference between the philosophy driving the two indexes.  The new Dow Jones STOXX indexes appear to be designed to capture the initial "IPO effect," the euphoric rush of interest in stocks that can sometimes lift them above their initial offering price. The 3-month index, for instance, would make no sense if it didn't capture this initial performance.

The Schuster indexes, in contrast, are more focused on long-term performance. Schuster says that the initial performance of IPOs can be irregular, and that better long-term returns come from waiting for the initial enthusiasm to die down.  In fact, the Schuster indexes exclude altogether companies that post extraordinary first-day gains.

In part, the difference in opinion may come from a difference of when the indexes were launched - in other words, whether they were pre- or post-Google. The Schuster indexes were launched pre-Google, when recent memory was of IPOs enduring an initial pop and then losing steam over time.  Google, of course, had a soft debut, but saw its price rapidly and quickly rise as investors cottoned on to its strong prospects; wait seven days and you would have missed some serious performance.

Interestingly, among the STOXX indexes, the indexes with shorter holding periods have outperformed those with longer time horizons.  Since inception in 2001 (using historical data), the 3-month index has gained 167 percent, the 12-month index has gained 127 percent and the 60-month index has gained 82 percent. (Starting in 2001, it should be noted, allows the indexes to avoid the results of the tech bust.)

STOXX envisions different uses for the three different indexes.  The 3-month index, it says, will serve as the underlying for structured products, while the longer-dated indexes will be more appropriate for exchange-traded funds (ETF) and mutual funds. The lack of diversification and the short holding periods in the 3-month index would make an ETF difficult.

Innovation

Another core difference between the index families lies in what kinds of companies they buy.  Schuster's indexes have a greater exposure to large-cap IPOs, and includes corporate spin-off as a way of adding stable, developed companies into the mix.  In contrast, the STOXX indexes do not include any IPOs with a market capitalization greater than 3 billion euros ($4.3 billion). While both funds tilt towards small/mid caps, the tilt is more pronounced in the STOXX funds, with a greater exposure to companies in the earlier stages of development.

Schuster, who's group offers both U.S. and European indexes, recently saw its European indexes picked up by ABN Amro to serve as the underlying for new indexed certificates in Holland, the first such IPO products in Europe.

 

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