AXA Framlington UK Mid Cap manager Chris St John has said now is a "good time to be cynical" as signs emerge of increasingly bullish activity in markets.
With the FTSE All Share posting a total return of 21% last year, and the UK economy continuing to strengthen, the number of UK initial public offerings (IPOs) reached a six-year high in 2013.
Some 105 companies raised £15.7bn by listing in the UK last year, with Royal Mail the most high profile. That trend has continued into 2014, but St John urged caution over the burgeoning number of issues.
He suggested fund managers should be using the recent equity market dip – the All Share fell 3.1% in January – to push down the prices of new issues.
“We look at IPOs with scepticism. Fund managers should be using the pull-back in the market to try to keep financiers honest, and to keep valuations down so you get rewarded for equity risk,” he said.
“This is a good time to be cynical. You are going to have to kiss a lot of frogs [when it comes to IPOs].”
The general bullishness is such, however, that many IPOs are seeing share prices take off as soon as they come to market.
One such example is Foxtons, a stock in which St John invested at the time of its placing.
Shares in the company rose by 30% in the four months since its September listing, and St John has already sold his holding.
The manager said opportunities like this show how he can be “pragmatic”, given his fund’s relatively small size at £68m.
More broadly, St John is ensuring his process remains scalable to ensure his fund can cope with future inflows. His only other recent IPO investment, which he anticipates will be a long-term holding, is invoicing technology company Tungsten.
Elsewhere in the fund, the manager has sold out of William Hill, a former mid-cap favourite which has now entered the FTSE 100.
Its entrance into the blue-chip index is not the only reason for the sale: St John anticipates further problems for the company as “regulatory noise” around the sector increases.
“We do look for reasons to sell once a company enters the FTSE 100, but it does look like the political risk for the industry has gone up when you see attention focusing on things like fixed odd betting terminals,” he said.
AXA Framlington UK Mid Cap, launched in March 2011, has returned 32.6% over the year to 31 January compared with an IMA UK All Companies sector average return of 16.4%, according to Morningstar.
'Integral part' of the financial planning process for many advisers
Proposals outlined at Labour Party conference
'Process usually takes 5-10 days'
Finance industry working to stop fraud
Partner Insight: Cathi Harrison, director of para-sols and Apricity and Clare Farrell managing director at Northfield Wealth met in London recently to discuss how to stay on top of regulatory risk.