History & Current Data Suggest that is as Silly as it Sounds

  • Introduction: Price Action Does Not Always Reflect Value
  • Financial Pornography: 1999 & Today
  • Conclusions & Exhibits

Introduction: Price Action Does Not Always Reflect Value

A recent Barron’s article cited research advocating the purchase of innovative tech-heavy indexes because:

  • value investing is dead
  • tech-heavy indexes were defensive based on Nasdaq’s performance during the COVID crash
  • tech-heavy indexes would generate higher returns in the years ahead as they embraced change[1]

Our interest in the article stemmed from the fact that, as documented in This Time is Different and How to Build a Growth Stock, the last few years’ price action has provided optical appeal to these claims.

Kailash notes that the concept has worked in arguably the most innovative and tech-oriented index we know of: The Renaissance IPO Index.[2] In IPOs, Index Inclusions and the Passive Patsies, Kailash provided evidence that the 2019 crop of IPOs added to major indexes were more overpriced than those at the peak of the internet bubble.  We also disagreed with articles suggesting recent IPOs were safer than those of 2000. Specifically, some claimed recent IPOs had been for firms operating 12 years prior to listing, unlike in 2000 when the average firm going public was only 4 years old.  Our assertion then was that losing money for 12 years instead of just 4 might be further proof of a failed business model.   Despite being very wrong since publication, Kailash is sticking to history and believes this paper provides evidence to recertify our conviction.

As Fig.1 below shows, the tech-heavy IPO ETF outperformed the S&P500, Russell 1000 Value, and tied the tech-heavy Russell 1000 Growth. [3]  Having navigated the downturn admirably, the IPO ETF’s outperformance from the trough has been stunning – rising 107%, walloping every other index.  To put the performance since the beginning of 2019 into context, IPO ETF has annualized returns of 95%.   The R1G had annualized returns of 49%, followed by the S&P500 at 15% and the dreadful Value Index actually falling at a -14% annualized rate. The IPO ETF has indeed provided both modest downside protection and explosive upside capture.

Looking for a historical proxy for the IPO ETF in the 1990s was not difficult.  In a February 2, 2000 article, CNNMoney explained how investors could participate in the IPO boom via a selection of mutual funds.  First on its list was the Oppenheimer Enterprise Fund, OENAX.  Like the IPO ETF above, OENAX exhibited lower downside capture and extraordinary upside capture into the end of 1999.

In the fund’s 1999 Annual Report, they noted the following key takeaways:

  1. The increasing popularity of day-trading was “troublesome” as it was gambling not investing
  2. Post the stunning run in the fund, the managers were “…enthusiastic about technology, the most dynamic sector of the U.S. stock market…the single most important reason the fund outperformed”[4]
  3. This focus on IT was further improved by avoiding sectors like oil and other industries heavily influenced by unpredictable variables while emphasizing investments in firms using technology to change the way people engaged with financial services

Kailash read the Investment Case for the IPO ETF, its most recent Annual Report and Prospectus. Summarily: the conclusions are much the same as those seen in OENAX’s 1999 Annual report documented above.  The OENAX fund was much like the holdings that currently populate the IPO ETF – Tech rich and loaded with recent IPOs.  Figure 2 below compares OENAX to the various other indices through the end of 1999.  The story looks uncomfortably similar to the one presented in Fig. 1 above.  Parabolic returns reinforced a growing belief that price was irrelevant as long as you stuck with tech-oriented transformational firms.

Kailash notes that in articles published between July and December of 1999, the confidence and enthusiasm for new, innovative, and tech-savvy firms went unfettered as prices rose.  Articles with titles like “IPO-packed funds warrant careful looks” and “Analysts expect the good times to keep rolling for IPOs” put the affinity to rationalize indefensible price increases on full display.  While one article did note that there were signs that the prices for these stocks had “…become irrational,” the overall consensus was bullish.[5]

Consultants and analysts were cited as believing the IPO boom was unstoppable.  Pricewaterhouse-Coopers noted that “…venture capitalists lavished money on companies”[6] as they sought to amplify their private market returns.  The words we printed at the top of page one – that firms focused on technology would continue to provide long term outperformance – were echoed almost perfectly in 1999.  One fund manager noted that these hot technology firms were “’where you’ll find the dynamic companies of tomorrow.”[7]  Indeed the view then, much as it is now, was that these “dynamic” companies represented the future today and the very “…entrepreneurial zeal with which businesses are created.”[8]

With the benefit of hindsight, the catastrophic fallacy of this thinking will surprise no one.  While one Fund Manager stated that these types of firms are not “…XXX rated investments…” the market offered up a profound rebuke.  In the fallout from December of 1999, OENAX fell 69% to its trough.   In absolute terms, when the fund was shuttered in 2007, investors were down 53% while the S&P500 rose 17%. Further still, those who went against the crowd and bet on value found themselves up 74%. 

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[1] https://www.barrons.com/articles/as-apple-hits-2-trillion-tech-stocks-are-set-for-exponential-growth-says-this-strategist-51598027060

[2] For purposes of operational simplicity, Kailash uses the ETF run by Renaissance, IPO, as a proxy for the Index which they run

[3] IPO has 33% in IT vs 48% in QQQ and 45% in the Russell 1000 Growth

[4] OENAX, 1999 Annual Report,

[5] Analysts expect the good time to keep on rolling for IPOs, The Galveston Daily News, Dec 26, 1999

[6] IBID

[7] IPO-packed funds warrant careful looks, The Boston Globe, July 25, 1999

[8] IBID


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