3 Funds Betting Big on IPOs

Russel Kinnel: Are IPOs and the funds that invest in them a good idea? Not exactly. Studies have found that IPOs tend to underperform the market. That might sound at odds with your own experience, but that’s because we remember the Teslas and Googles of the world and think, “Wouldn’t it have been great to buy them at the IPO price?” Of course, we forget the failures pretty quickly, and studies suggest there actually are more failures than there are winners.

One way to improve upon that is to buy funds that invest in companies before they go public. That often means they get in at a cheaper price, but it comes with tie-ups that may prevent them from selling until many months after the stock goes public.

Unlike the average IPO, these three funds have actually outperformed. These funds are relatively aggressive funds that tend to lose more in growth downturns but make more in rallies.

3 Funds Betting Big on IPOs

1. T. Rowe Price New Horizons PRNHX
2. Fidelity Small Cap Growth FCPGX
3. T. Rowe Price Small-Cap Stock OTCFX

T. Rowe Price New Horizons is a Silver-rated fund with a sizable dose of private stocks and some relatively recent IPOs. Josh Spencer balances established growth companies with emerging growth companies such as early-stage biotech. The fund took a hit in 2022 but has generally produced solid results. It also reopened to new investors in April.

At Silver-rated Fidelity Small Cap Growth, Patrick Venanzi allocates a quarter of the portfolio to emerging growth companies—primarily ones that are already public but still in their early-growth phase. The fund is fairly steady by small-growth standards. It has outperformed most years of Vananzi’s tenure, leading to an excellent long-term record.

Finally, T. Rowe Price Small-Cap Stock is a much more defensive and valuation-sensitive fund than the first two, but it still has 6% of assets in private firms and it may appeal to those risk-averse investors out there. The fund is a very diversified portfolio of quality companies with strong balance sheets and established market positions. Alex Roik will move from the comanager’s seat to the lead manager in January 2024.

Watch “3 Biggest Mutual Fund Downgrades of 2023″ for more from Russel Kinnel.