I have seen recent news reports about companies such as Facebook and Manchester United issuing IPOs to investors. Is this something I should consider for my investment portfolio?

An IPO, or Initial Public Offering, is the first sale of shares of a private company to the public. In an IPO, the company receives the money directly from the initial buyers of the stock. A company’s IPO usually comprises only a portion of the value of the company and is used to raise capital for a particular purpose, including but is not limited to company start up, merger and acquisition, company restructuring and balance sheet restructuring.

Accordingly, an IPO serves as a useful alternative to funding by retained earnings or debt, and is one of the most convenient ways to secure the continued growth of the business.

Nonetheless, listing on a recognised stock exchange such as the New York Stock Exchange, NYSE, means that the business will receive wide media coverage, thus increasing the company’s visibility and recognition of its products and services. Listed companies are subject to strict financial and reporting regulations which augers well for their future ability to borrow or to issue more shares. Some of the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit.

LEVEL OF RISK

While IPOs provide significant advantages for the issuing company, they can present downside risks to the investor. Once the shares are listed on the securities exchange, investors are exposed to the unpredictable nature of the stock market as the share price will be determined by the forces of demand and supply.

Manchester United Ltd. (MANU), touted by Forbes Magazine as the most valuable sports team in the world, recently registered its US initial public offering. The objective of the IPO was to use the capital raised to repay debt. However, since its issue, the share price has declined 3.57% from US$14.00 per share to US$13.50 per share on August 16 2012.

Likewise, Facebook, the social networking behemoth, founded by Mark Zuckerberg, has dropped precipitously from the US$38 IPO price offered to shareholders on May 18, 2012, to about US$21.60 on August 13 2012. Vonage, too, the highly sought after Voice-Over-Internet provider, went public in 2006 with an opening trading price of US $17 a share. Within a day, it had fallen 24 percent and now trades on the edge of US$2 a share.

The jury is still out on whether Facebook or Manchester United’s shares will rebound but such is the unpredictability of IPOs which are surrounded by media hype. It is even tougher to assess the performance of the stock as there is limited historical data available with which to analyse the company. Also, most IPOs are from companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.

Given the inherent risks and volatility associated with an IPO, investors need to tread carefully as savvy advertising does not necessarily translate into consistent returns or sustainable growth rates. Investors are advised to review the company’s SEC registration statements as well the IPO’s prospectus to ensure that the company’s fundamentals and the IPO’s objectives are in line with that of the investor’s risk appetite and investment objectives.

THINK DIVERSIFICATION

At the UTC, our goal is to ensure that your portfolio is well diversified and that not all your eggs are placed in one basket. One avenue is through a mutual fund, which typically involves building a diversified portfolio of stocks, bonds and cash or other money market instruments.

Such asset class diversification allows investors to limit their risks by reducing the effect of a possible decline in the value of one any asset class or security, so if one asset class or security underperforms the others can offset the impact. This allows you to diversify your investment without the hassle of buying directly into a particular stock or bond as is the case with an IPO.

An investor who wishes to focus on maximising growth should consider the UTC’s Growth and Income Fund where the investor has the potential to earn capital growth and dividend income. Diversification involves not only investing in equities but also fixed income instruments: Treasury Bills (T-Bills) and high-quality bonds via bond or income funds, such as the UTC’s Global Bond Fund and UTC’s US$ Income Fund.

The investment professionals at the UTC seek to capitalise on opportunities that arise as well as implement techniques to mitigate risks. The objective of our portfolio managers is to help investors enhance the performance of their investment portfolio and to identify ways for them to continue to save effectively and generate wealth.