IPO Fund Gets Record Cash in Best Year Since ’99 on Twitter

Jan 17, 2014 4:41 pm ET

(Updates with S&P 500 closing level in sixth paragraph.)

Jan. 17 (Bloomberg) -- The best year for U.S. initial public offerings since the 1999 technology boom is driving record money into an exchange-traded fund that invests in newly listed companies from Twitter Inc. to General Motors Co.

The First Trust U.S. IPO Index Fund attracted $165 million in the last three months of 2013, the most for a quarter since it started in 2006, according to data compiled by Bloomberg. That brought the total annual inflows to a record $280 million. The Bloomberg IPO Index climbed 64 percent last year, the biggest jump in 14 years, pushed by gains in Twitter and Hilton Worldwide Holdings Inc. Facebook Inc., which began trading in 2012 and has the biggest weighting in the IPO fund, doubled.

Appetite for equities drove U.S. companies to sell $56 billion in new shares last year, the most since 2007, data compiled by Bloomberg show. Investors poured the most money in almost a decade into equity funds, as Standard & Poor’s 500 companies added more than $3.7 trillion in market value. Demand for IPOs will remain strong amid a recovering global economy, said Romain Boscher at Amundi Asset Management.

“People’s appetite for IPOs is back, and there is a mismatch between equity supply and demand,” Boscher, who is responsible for equities at Europe’s biggest asset manager, said in an interview on Jan. 7. Amundi oversees about $1 trillion. “There was a sort of queue of companies planning to tap the market as soon as the opportunity was right. And now with higher prices and low volatility, that time has come. This is very favorable for IPOs.”

S&P 500 Rally

Three rounds of bond purchases from the Federal Reserve have triggered a 173 percent gain in the S&P 500 since March 2009 and the lowest volatility in almost seven years, encouraging companies to sell stock. U.S. shares rallied to an all-time high after the Fed said it would begin reducing the pace of its stimulus, increasing investor’s confidence in the economic recovery. The Chicago Board Options Exchange Volatility Index, which tracks estimated S&P 500 swings, is near its lowest level since February 2007.

The S&P 500 slipped 0.4 percent today, and the Bloomberg IPO index was little changed.

Companies raised about $22 billion in U.S. IPOs in the fourth quarter, according to data compiled by Bloomberg. Sales in Europe and Asia rose too, helping global deals triple from the prior three months.

S&P 500 companies have never been this valuable, with a market capitalization of $16.5 trillion, the data show. Investors added $244 billion into global-equity funds in 2013, the most since 2004, according to data from EPFR Global and Bank of America Corp.

Increased Conviction

The performance of IPO stocks following their listing shows increased conviction in the outlook for the broader market, said Will Hedden at IG in London.

“IPOs are being caught up in the strength of the market,” said Hedden, whose company offers investments in recent IPOs such as Twitter and Facebook. “It’s been a big feature of the year. The average investor is getting more of an opportunity to get involved, just as IPOs are being more successful. It’s becoming more of a focus in the market.”

The number of shares outstanding on the First Trust IPO fund surged almost 10-fold last year, data compiled by Bloomberg show. There were a total of 8.35 million shares yesterday, the most ever.

The ETF tracks the IPOX-100 U.S. Index, which jumped 47 percent in 2013, the biggest increase since 1999. The gauge includes companies with a market value of at least $50 million, according to IPOX Schuster LLC, the index compiler. The stocks stay in the measure for 1,000 trading days following the offering, IPOX founder Josef Schuster said in a phone interview.

Twitter, Hilton

Twitter, the owner of the microblogging service, sold shares for the first time in November at $26 each. It closed at $60.57 yesterday. Hilton, the world’s biggest hotel operator, has climbed to $21.96 from its initial sale at $20 in December. Facebook, the world’s most popular social-networking service, is up 51 percent since its May 2012 IPO price of $38.

The IPO ETF is more prone to losses in worsening market conditions, when there are fewer initial share sales, according to Dave Lutz, the head of exchange-traded fund trading and strategy at Stifel Nicolaus & Co. in Baltimore. The ETF tumbled 44 percent in 2008 when the financial crisis roiled markets, worse than the 38 percent decline for the S&P 500.

“Your liquidity is going to dry up, you are not going to have as many IPOs in down markets,” Lutz said in an interview on Jan. 7. “It may also be that venture capitalists and the companies themselves will be looking to cash out in a down market, which could create more and more of a liquidity problem, more and more pressure.”

No Fading

For Oliver Wallin, who helps oversee $5.6 billion as investment director at Octopus Investments Ltd. in London, demand from investors to participate in new listings won’t fade out in the short term as the global economy strengthens.

Banco Santander SA and Blackstone Group LP are among companies planning initial share sales. The Spanish bank’s U.S. consumer lender subsidiary, which originates subprime loans for new-vehicle purchases and leases, this month filed to raise as much as $1.56 billion in an IPO. Blackstone is seeking to sell shares of its La Quinta Holdings Inc. lodging chain, according to a December statement.

“There is just more risk appetite out in the market at the moment and people are prepared to pay more to participate, so we’ll see more of this,” Wallin said in a phone interview. “It’s an opportunistic strategy.”

--With assistance from Ruth David in London. Editors: Cecile Vannucci, Srinivasan Sivabalan