But the current IPO market is so buoyant that shares purchased in the so-called aftermarket are delivering impressive gains. According to Renaissance Capital, an IPO research firm that manages the IPO Plus Aftermarket mutual fund, investors who bought IPOs at the first day's closing price in 1999 netted an average 69 percent return through year-end. Internet IPOs bought in the aftermarket returned 86 percent, telecommunications stocks yielded 59 percent, and health care and biotech each delivered 43 percent. A strong aftermarket for IPO shares is unusual and may not last long. In a study looking at IPOs from 1970 through 1997, Ritter found issues bought at the first day's closing price lagged comparable firms by an average 5.1 percent annually in the first five trading years.
Timing is crucial.
He's been building positions in recent IPOs Avanex, Quantum Effect Devices, and Turnstone, at prices substantially off early peaks. Those who prefer to leave the research and timing to professionals can play the IPO market via mutual funds. Indeed, some fund holders may be more committed to IPOs than they realize, with some 50 funds staking 20 percent or more of their assets in companies that have gone public within the past year, according to Morningstar. Last May, there were only three such funds. I should debut by this summer.