Catalyst IPOx Allocation Fund (OIPIX): Powerful Returns Driven by High Caliber IPOs
OIPIX: Powerful Returns Driven by High Caliber IPOs
In 2018, investors saw a surge in activities connected to initial public offerings (IPOs), as 190 companies entered the market and collectively raised a total of $47 billion. But the current IPO pipeline may be even more intriguing, as several multibillion-dollar companies are slated to enter the public market this year. These highly anticipated new issues have the potential to ignite the market’s interest in the months ahead and many investors are looking for ways of gaining sustainable exposure to new growth opportunities as they develop.
One option is the Catalyst IPOx Allocation Fund (OIPIX), which applies quantitative models to select and rank high-caliber IPOs using two distinct and complementary strategies. The Fund includes roughly 150 long equity holdings, with an average market capitalization of $13.3 billion and a median market capitalization of $5.1 billion. Stock weightings are broadly distributed across industry sectors, with information technology stocks making up 32.0% of the total holdings, health care stocks making up 24.2% of the holdings, and communication services making up 12.7% of the holdings.
The Fund’s Core Long Component includes exclusive mutual fund access to the IPOX U.S. 100 Index, which tracks a group of 100 top-ranked companies in the IPOX U.S. Composite Index and has exhibited a strong level of long-term outperformance relative to the S&P 500. Common stock in these high-quality companies is purchased either at the time of the initial offering, or later during the post-IPO trading phase. Stocks exhibiting bullish momentum and sustainable growth in market value during the periods following the initial floatation are analyzed as viable opportunities for inclusion in the Fund.
Since 2014, the IPOX U.S. 100 Index has produced returns of 695.64% (as of March 31, 2019). Over the same period, the S&P 500 Total Return Index has produced returns of only 261.24%. The divergences here are exceptionally striking, given the fact that the S&P 500 broke above its prior all-time highs during this timeframe. The underlying strength of these trends supports the outlook for continued moves higher in shares of OIPIX.
In conjunction with the Core Long Component strategy, the Dynamic Component of the Catalyst IPOx Allocation Fund’s identifies 30 to 70 attractively valued IPOs (based on price/sales multiples) not included in the Core Long Component. Timing is critical for this portion of the strategy, as stocks become eligible for inclusion on the IPO date and remain viable as potential investment opportunities for a period of one month. The sum result of these dual approaches is a unique market instrument designed to capture the enhanced long-term returns often associated with promising IPO investments.
Broad sector diversification is another feature of the Catalyst IPOx Allocation Fund. Key stock holdings include Paypal (PYPL[NGS] – $112.92 Trade ), Takeda Pharmaceutical Ltd (TKPHF[OTO] – $34.94 ), Verizon Communications (VZ[NYE] – $58.85 Trade ), Thermo Fisher Scientific (TMO[NYE] – $266.69 Trade ), Stryker Corp. (SYK[NYE] – $185.81 Trade ) and Worldplay, Inc. (WP[NYE] – $122.02 Trade ). Impressively, all of these companies beat consensus estimates for earnings during the most recent reporting period, and these bullish performances have helped drive OIPIX gains relative to the S&P 500.
As the Catalyst IPOx Allocation Fund’s largest stock holding, recent earnings performances from Paypal have been particularly notable. For the first quarter, Paypal reported adjusted EPS of $0.78 (beating analyst expectations by 14.71%) on revenues of $4.13 billion. Total payment volumes rose by 25% on an annualized basis (to $161 billion), and the company revealed its peer-to-peer payment app Venmo is on pace to generate revenues of $300 million in 2019.
Strong earnings growth amongst these companies has been widespread, and this suggests share gains in OIPIX may continue. Another notable example can be found in Thermo Fisher Scientific, which posted earnings of $2.81 per share during the most recent reporting period. This figure beat analyst estimates by $0.07, and the company’s revenues of $6.13 billion also beat expectations by $89.47 million. The market is currently anticipating annualized earnings growth of 13.78% for Thermo Fisher for the second quarter and earnings growth of 12.27% for the third quarter.
Consistencies in projected growth and earnings have been reflected in market valuations. For the period 06/30/2017 – 06/30/2018, the Catalyst IPOX Allocation Fund returned +21.20% and significantly outperformed its S&P 500 Total Return Index benchmark by +683 basis points. Over the last three years, those performances have been recognized with Morningstar’s 5-star rating for risk-adjusted returns positioned at the top of the mid-cap growth category (555 total funds). These three-year performances were also recognized with a Lipper Fund award from Refinitiv as the best alternative event driven fund (with the highest consistent return value out of 49 total funds).
While U.S. equity markets continue to exhibit evidence of underlying stability, the continued trend implication is that 2019 may be a massive year for IPOs. While the total number of public offerings could decline this year, there are several events on the horizon with the potential to generate an explosive impact on the market. As a result, sustainable consistency in deal flow should create a favorable environment for the Catalyst IPOx Allocation Fund. YTD returns in OIPIX continue to outpace the S&P 500 Total Return Index benchmark and this bullish activity is likely to catch the market’s attention in the quarters ahead.