Will FTSE fresh blood like Moonpig and Dr Martens revive your returns?

After a quiet few years, the FTSE is set to welcome a wave of fresh blood.

Alongside Dr Martens and Moonpig – both of which joined the FTSE this week – a number of multi-billion pound companies are preparing to ‘go public’.

This will be the first time these companies will be open to retail investors.

Investors often get excited about IPOs (initial public offerings), as they can be a chance to buy into a fast-growing company.

The IPO boom should also deliver a jolt to the wider FTSE, which has been flagging in recent years.

So should you seize the opportunity to freshen up your portfolio? And can you get in before the crowd?

Time for a change?

As many investors will know, the FTSE hasn’t had a great run lately.

This is not a reflection of the UK economy. Indeed, many of the weakest performers are large multinationals with no connection to the British High Street.

Oil majors, mining companies and struggling banks have contributed to the FTSE 100’s reputation as an outdated index.

To worsen matters, the number of companies joining the stock-market has ground to a halt.

Dynamic new companies – the likes of Pret A Manger, for example – have instead raised money privately from rich investors.

That’s bad news for everyday investors and pension funds, which can’t benefit from their success. It is a problem for the FTSE too, which has become less popular with international investors.

But 2021 may prove to be the year that starts to change.

The new kids

The City of London is excited about a number of upcoming IPOs expected to take place this year.

They include lockdown winner Deliveroo (estimated to be worth £5 billion), Cambridge-based cyber experts Darktrace and craft beer pioneers Brewdog.

For Rob Burgeman, investment manager at Brewin Dolphin, the IPO frenzy is good news for the wider market.

‘It shows that the animal spirit has returned to the stock-market,’ he says. ‘People are feeling confident enough in the future to want to float their companies.’

Investors will also be hopeful that the likes of Deliveroo and Brewdog follow the trend of recent IPOs – where share prices often shoot up after listing.

That was certainly the case for Manchester-based retailer The Hut Group, which joined the FTSE last year.

The firm was the biggest IPO in London for seven years, and was accompanied by a large buzz.

Its shares have since risen some 30 per cent in four months, rewarding those who got in early.

Dr Martens stocks opened at 22 per cent above the IPO price when it floated on Friday, but has slipped 1 per cent since. Moonpig opened at 25 per cent above, but has since fallen 5 per cent.

So how can you get in first this time – and beat the crowd?

Get in first

The IPO process itself is complicated, with the first public shares typically offered to large institutional investors.

‘It’s a long-running grumble among private investors that they rarely get to participate in IPOs ahead of flotation,’ says Lee Wild from Interactive Investor.

Even so, it’s worth checking the website of your investment platform about details of upcoming IPOs – and signing up for email alerts of future offers.

There are other ways, however, for investors to put some of their money into new companies.

When large investors invest in private (i.e. pre-IPO) companies, they will often include these shares in their retail funds. 

Edinburgh-based Baillie Gifford, for example, has become well known for investing in pre-IPO companies. Most famously, the investment house was an early backer of Tesla.

Its flagship Scottish Mortgage Investment Trust allows for 30 per cent of investors’ money to be put into private (non-listed) companies.

This strategy has paid off in recent years, with £10,000 invested five years ago now worth more than £50,000 (before fees).

For retail investors, this has the added benefit of diversification: you’re essentially investing in dozens of companies at once.

Risky Buys

But experts warn that -for all the excitement -investors should be wary of assuming every new offering is a guaranteed winner.

‘Not all IPOs go well, as those who snapped up shares in Aston Martin Lagonda will ruefully tell you,’ warns Russ Mould from investment platform AJ Bell. 

The car-maker issued its first shares back in autumn 2018, at a price of more than £10,000.

Since then, its shares have plummeted, losing 80 per cent of their value in just over two years.

And in the U.S., some high-profile IPOs have fallen short of expectations.

Ride sharing platform Lyft, a competitor to Uber, has fallen 40 per cent since March 2019.

The company had originally been tipped by Baillie Gifford, and was included in its retail funds.

‘When it comes to IPOs, investors certainly need to take each deal on its merits and carefully assess each company’s competitive position,’ says Mr Mould.

Either way, investors can look ahead to an interesting year — and hopefully a stronger FTSE, too.

[email protected]