Freshly issued stocks aren’t novel, of course. But individual investors have rarely had the chance to buy these choice morsels at their offering price. And nabbing newly minted stock during its first few days of trading–usually after the price has soared–was too treacherous. Now, though, we small-timers are being given a chance to get in on the action. Fidelity Brokerage Services and Donaldson, Lufkin & Jenrette are selling IPOs to customers, and Charles Schwab is considering such a move. Fidelity’s service is the best. It gets 10 percent of every Salomon Brothers IPO to parcel out to its customers, who pay no commission for the stock. Fidelity has already served up a half-dozen new issues. Donaldson won’t be letting ordinary investors into its IPOs until later this year (through an on-line brokerage service called DLJ Direct, at www.pcfn.com). Even then you’ll probably need $100,000 in assets at DLJ to gain admission.
The great appeal of IPOs is that they’re stocks on steroids, likely to quickly rise in price. Standard & Poor’s New Issues Index, which tracks stocks during their first six months of life, nearly doubled in 1995, while the Standard & Poor’s 500 Index rose 34 percent. “You can beat the market with IPOs as long as you’re disciplined about selling,” says Robert Natale, director of Equity Research at Standard & Poor’s. He says the best time to dump IPOs is after three to six months, when they begin to lose the underwriting firm’s support and company insiders may sell their shares. Don’t overlook more basic risks, either. IPOs often have short histories, are tough to research and sometimes contain more glitz than earnings power. Fashion designer Donna Karan sold shares in her company for $28 when it went public last year. Now the stock sells for $12.
If you love the simplicity of buying index funds and want international diversification, you should know about these fledgling securities. There are 17 WEBS (World Equity Benchmark Shares) representing 17 countries, and each acts like a stock traded on the American Stock Exchange. But when you buy a WEBS Germany, for example, you’re acquiring a share in a pool of German stocks that behaves like the overall German stock market. Before WEBS, the only way to place a bet on an entire country’s stock market was to buy a closed-end single-country fund. WEBS look most attractive compared with that alternative. You don’t have to worry about WEBS trading at a price significantly above or below the market value of the underlying stocks, as you do with single-country funds. WEBS were priced within a whisper of the stocks they contain for the quarter ending in March, while international closed-end funds were selling at an 11.3 percent discount. Also, WEBS expenses are lower, ranging from .8 to 1 percentage point.
But WEBS don’t quite live up to their objective. They’re supposed to track the index that Morgan Stanley Capital Internationaldevised for each country. But after one year of existence, WEBS Belgium lagged by 3.31 percentage points, and WEBS Malaysia fell behind by 3.02 percentage points. WEBS miss their mark because they don’t contain all the stocks in the MSCI indexes and don’t handle dividends the same:way. “That to me is a major negative,” says Gregg Wolper, closed-end fund editor of Morningstar Mutual Funds. Though WEBS are denominated in dollars, you don’t escape currency risk by owning them. Be a buyer only if you want to make a bet on another country’s economy without the interference of a fund manager. Expect to pay the same commission as for a stock purchase, about $89 for $5,000 worth of WEBS through Schwab. Some brokers, such as Fidelity, don’t offer WEBS yet.
These are the ultimate contrarian buy: protection against inflation just when it seems to have been defanged. Do you need it? No one knows. But you should understand how the bonds can help or hurt your portfolio. The new inventions, which first hit the market in January, are designed to keep pace with the consumer price index. With regular bonds, the higher inflation rises, the less of a real rate of return you get. With indexed bonds, your return will never be whacked by inflation.
That certainty is a great deal for investors, except for two things. Inflation could fall, instead of rise, in which case you’d make more money with regular Treasuries. Also, inflation-adjusted Treasuries harbor some cash-flow and tax headaches. Because it’s the bond’s principal that gets adjusted for changes in inflation, not its interest rate, these securities don’t throw off much cash. A lot of your return comes at maturity, when you collect the principal and all the inflation-matching hikes it’s collected over the years. The trouble is that you have to pay annual taxes on both the interest payments-no problem because you receive them in cash-as well as the yearly inflation boost to your bond’s value, for which you receive no cash.
One way to sidestep the tax problem is to hold these bonds in a retirement account. You can buy $5,000 worth of inflation-indexed Treasuries for $50 at Fidelity. Ordering them through Treasury Direct at a Federal Reserve bank (call 202-452-8245 to find the nearest one, or 202-874-4000 to learn about coming Treasury auctions) is free, but the service won’t establish a tax-deferred account for you. Another option: buy an imitation-indexed bond fund. PIMCO (800-628-1237) and American Century-Benham (800-845-2021) offer tax-deferred accounts and another benefit: full payout of both interest and the yearly inflation hike. But the disadvantages of funds outweigh those benhies. First, their expenses erode your returnby a half of a percentage point or so each year. And you could lose part of your principal if you sell at the wrong time. “They’re no more or less safe than another bond fund,” says David Schroeder, manager of American Century-Benham Inflation-Adjusted Treasury, which has lost.8 percent since its launch in February. Why add risk to what is a worry-free investment when you hold the bonds to maturity?
Read the prospectus for Oppenheimer’s Real Asset Fund and you know you’re on the outer limits of the risk spectrmn. Let’s see…the funds’ investments “involve higher volatility and risk of significant loss of principal than investments in equity or debt securities.” The fund is nondiversified, which will “entail greater risk,” and its managers “have only limited” experience investing in the fund’s commodity-related securities.
So why would anyone want to go near this beast? “It’s very unique,” says Susan Paluch, managing editor of Morningstar Investor, a mutual-fund newsletter. Real Asset Fund invests in synthetic bonds whose values are linked directly to returns in the commodities market. You really don’t want to know how Oppenheimer creates these oddball securities. The point is that the fund is designed to match or beat the performance of 22 commodities in a Goldman Sachs index. The only other way to play the commodities market without a fat bankroll is to invest in the stocks of companies that mine, extract or grow commodities-which is a bet on management, efficiency and an industry, as well as on the actual goods.
If you’ve lived this long without pork bellies and industrial metals, chances are you’ll do fine without this fund. But it does have one undeniable attraction at a time when the stock market is setting record highs: commodity prices tend to rise when stocks and bonds fall. This contrary behavior, called “negative correlation” by money managers, is perfect for blunting your portfolio’s losses in a mean market. And such hedges have been tough to find lately. Bond prices used to part company with those of stocks on a regular basis, but not in recent years. Real-estate investment trusts diverge somewhat from stocks and bonds. But put 10 percent of your portfolio into commodities, says a Goldman Sachs study, and your total return could be 8.8 percentage points higher in down markets than if you had stuck 60 percent of your portfolio in stocks and 40 percent in bonds. Remember, though, Real Asset Fund, launched on March $1, is still unseasoned, carries front-end or back-end sales fees and, as the prospectus warns, is full of risks. You might have more fun watching this one than owning it. That’s often the case with Wall Street’s untested products. Remember, the penalty for waiting before leaping isn’t as steep as a bellyflop on uncharted waters.
