Hyperion portfolio manager Joel Gray said rising equity markets have seen the rate of IPOs rise and while investors may be lured by the prospect of short-term profit taking, this can lead to “disciplined investment processes flying out the window”.
“It is well-known that companies often list at an initial premium, so the temptation is certainly there to buy in at the beginning and take the short-term gains,” said Mr Gray.
He believes, however, that rather than looking to profit from short-term price hikes at listing, long-term investors should be analysing floats the same way they would for any potential stock, with a “focus on fundamentals and a long-term horizon”.
“In fact, we see the recent spate of IPOs as a good test of whether a fund manager will stick to a disciplined investment process, or succumb to the desire for short-term gains,” said Mr Gray.
He said high quality companies outperform over the longer term and that sustainable earnings growth is vital to the performance of equities.
“Ultimately, this means investing in growing businesses with superior economics, at an attractive price,” said Mr Gray.
He said investors should be looking for a high return on equity, a proven track record of success, low gearing and organic, sustainable growth.
“This naturally cuts out a number of companies looking to list - for some it is because the listing is based on a promise of future success, and without a track record to judge by, we take the view that no matter how compelling the promise, we prefer to wait and see,” he said.
Mr Gray said out of the 50 listings analysed by Hyperion in the past 12 months, only two shares, OzForex and Veda were chosen.
Hyperion said OzForex is an online service for transferring international funds while Veda is the largest credit ratings agency in Australia and New Zealand.
“In the case of OzForex, not only is the return on capital high, but return on equity is in the order of 60 per cent, the company is debt-free and sales are growing at three per cent per annum” he said.
“We predict high growth for OzForex, which provides a quicker, cheaper option for transferring money overseas than the major banks.”
