News of a potential Hewlett-Packard (HPQ) spinoff got me thinking about specialty funds holding shares of spinoffs and those that have recently had their initial public offerings.
Not only do S&P index funds hold HP, but large numbers of active funds also hold shares. If the new company doesn't meet an active fund's mandate, the fund will sell shares.
But new companies are the lifeblood of funds such as the Guggenheim Spin-off ETF (CSD), the Renaissance IPO ETF (IPO), and the Global IPO Fund (IPOSX).
The Guggenheim ETF tracks the Beacon Spin-off index, which includes companies that have been spun-off within the past two years -- although they must wait six months before being eligible to join the index.
Top 10 holdings are: Mallinckrodt (MNK), Zoetis (ZTS), Whitewave Foods (WWAV), ADT (ADT), Brookfield Property Partners (BPY), AbbVie (ABBV), CST Brands (CST), Kraft Foods Group (KRFT), Phillips66 (PSX) and Murphy USA (MUSA).
I've written many times that research from Investor's Business Daily has shown that newly public companies are often among the market's biggest price gainers. Over the years, I've noticed that spinoffs are also among fast-growth leaders.
Of that group, every stock other than ADT is currently showing technical performance that's better than that of the broader market (not just the S&P) over the past 12 months.
Spinoffs show some of the same youthful energy you find in IPOs, and for similar reasons. Not only is shareholder value being unlocked, but managers of the new firm embrace their freedom, and are eager to pursue projects and markets that may have been out of reach within the larger entity. Managers also have stock option incentives to grow share price -- and that's usually a good motivator!
The Guggenheim Spin-off ETF itself has essentially been flat-lining this year, after having notched strong gains in 2012 and 2013. But before you get carried away, remember: U.S. stocks in general had good years in 2012 and 2013! So the gains are not necessarily indicative of an exceptionally brilliant strategy.
In my mind, there's no question that this ETF is based on a gimmicky premise, despite spinoffs' potential. It's an interesting proposition to include a fund like this, or one of the Renaissance IPO funds, in a portfolio. However, its inclusion would be purely speculative, as there's not even an expected return that can be calculated for the asset class (if you can even call spinoffs and IPOs asset classes -- and I'm not sure you can).
The Renaissance IPO ETF launched almost a year ago, so the jury is still out. It's shown a net gain of 1.3% since its debut on Oct. 16, 2013.
The mutual-fund version, managed by Renaissance, has shown lackluster performance over its 16-year history, as well as high volatility.
You'd think these funds would be going gangbusters, given the outperformance of IPOs, relative to the S&P, right? Well, it shows that packaging a concept doesn't always work out in the way you might imagine. Given that newly public companies, like all other stocks, are part of sectors that go in and out of favor, it would be tough to consistently outperform with simply a basket of new companies.
At the time of publication, Stalter had no positions in the securities mentioned.