Investors looking at IPOs are demanding a higher expected return to compensate for increasing volatility in the sector, says State Street Global Advisors (SSgA).
SSgA head of quantitative equity for the Asia Pacific, Olivia Engel, said IPO volatility, which is 1.4 times higher than other listed stocks, is leaving investors wanting more certainty on returns before they incorporate them into their portfolio.
Ms Engel pointed out that on average, volatility of each IPO over $100 million was 1.8 per cent from 30 September 2014 to 9 February 2015, while the average volatility of each stock in the 20 leaders index was 1.3 per cent.
“This volatile behaviour means they need to command an even higher expected return before they can get into our portfolio,” Ms Engel said.
“We prefer more certainty around expected returns, and (usually but not always) lower absolute volatility with stocks we hold in the portfolio.
“IPOs are unlikely to provide us with that certainty, and the evidence we have seen in recent years reinforces that approach,” she said.
Ms Engel pointed out that during 2014 there was a total of 26 IPOs greater than $100 million, up from 17 in the previous year.
Of the 26 deals, Ms Engel said that due to volatility, only half managed a positive return on the day they were listed while less than half had a return in the first month greater than the market return.
“The larger deals (greater than $500 million; six in 2014), generally posted a positive market-relative return in the first month of listing.
“However, in 2013 all IPO deals greater than $500 million posted a negative return versus the market in the first month of listing,” Ms Engel said.
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