US IPOs beat the market more often than Europe and the UK – but it may be best to buy afterwards says Kleinwort Benson

6th October 2013

With many high profile IPOs in the offing not least the Royal Mail in the UK and Twitter in the US, Kleinwort Benson have calculated what has happened to past market debutants’ share prices in the 12 months after investment.

The investment bank suggests that IPOs are certainly not a one way bet based on its research into the average return on investment when investing in IPOs since 2003.

The calculations are market cap weighted so it shows what happened to the money that was actually invested.

Gene Salerno, Head of Equities at Kleinwort Benson, says: “IPOs are no sure thing. Looking at IPO return data for the past ten years, where we can see how the cap-weighted aggregate of IPOs have performed for 1 year following their offering, we see that the average annual excess return (over S+P 500) for US IPOs has been 2.6 per cent per annum (year ending 28 Sept), indicating outperformance. However, it’s been -3.5 per cent for European IPOs (against MSCI Europe incl UK) and -10.2% for UK IPOs (vs All Share).

The firm says that drilling down into the UK’s performance produces the following results – 2003 +7% outperformance against the All Share; 2004 +9.6%; 2005 +4.4%; 2006 -8.8% (underperformance); 2007 -22%; 2008 -21%; 2009 -10.7%; 2010 -4.6%; 2011 -30%.

“Over those same ten year timeframes, only 6 of the 10 years saw outperformance from US IPOs versus 4 years where IPOs underperformed the S&P 500. The ratio has been worse in Europe, where 6 of the last 10 years of IPOs failed to outperform their market indices.

“If the company is attractive, long term investors would often do better to buy in the aftermarket when the froth has blown off the shares, and when they can be sure they can buy the size of investment they want.”

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