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IPO Fund Rides the Wave

The selector: William K. Smith, founder of Greenwich, Conn.-based Renaissance Capital, which specializes in research on initial public stock offerings, and co-manager of the $15-million IPO Plus Aftermarket Fund (ticker: IPOSX), billed as the only mutual fund of its kind.

* His record: Though it got off to a modest start, the fund, which is co-managed by Smith’s Wharton School colleagues Kathleen Shelton Smith and Linda R. Killian, has hit full stride amid this year’s IPO craze. Launched at the end of 1997, it returned 18.4% in 1998, trailing the blue-chip Standard & Poor’s 500 index by 10 percentage points, according to fund tracker Morningstar Inc. of Chicago. But through Monday, the fund has returned 79% in 1999, shellacking the S&P; 500.

* His philosophy: The fund gives individuals the chance to invest in IPOs that might not otherwise be accessible to them. Of course, while it won’t offer the huge pop of a single spectacular new stock, the fund limits risk by spreading its bets around, as with any mutual fund. As the name implies, the fund buys stocks at their initial offering and in the “aftermarket,” once they have begun trading. The managers are not afraid to buy and hold: One of the fund’s biggest positions is in E-Trade Group Inc. (EGRP), for example, which went public in 1996; and top holdings include Convergys Corp. (CVG) and E-Tek Dynamics (ETEK), which came out in 1998. “We’re the antithesis of the day traders flipping IPOs,” Smith said. (For information on the fund, call [888] 476-3863.)

* Ticker symbol: COVD

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* Market capitalization: $5.8 billion

* Latest quarter sales: $19.1 million

* Estimated 1999 earnings per share: --$2.88

* Ticker symbol: SCMR

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* Market capitalization: $19.1 billion

* Latest quarter sales: $17.7 million

* Estimated 1999 earnings per share: --3 cents

* Ticker symbol: UPCOY

* Market capitalization: $14.0 billion

* Latest quarter sales: $130 million

* Estimated 1999 earnings per share: N/A

Monday:

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$56.13,

up from

$12 at IPO

Monday:

$229.06,

up from

$38 at IPO

Monday:

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$96.75,

up from

$37.81 at IPO

* Smith’s selections: The fund has about 30% of its assets in Internet infrastructure-related stocks, the hottest IPO sector.

His favorite Internet infrastructure picks include Covad Communications Group Inc. of Santa Clara, Calif., which provides high-speed access using digital subscriber line technology over standard copper phone lines.

“With content plays like, say, Drkoop.com or IVillage, you’re basically betting they’ll become No. 1 and be another Amazon.com, and you’re relying on the advertising profit model,” Smith said. “But with infrastructure plays, you’re saying you think Net usage is going to increase and users will be demanding more bandwidth, higher-speed access. For companies like Covad that are leaders in their space, that’s basically a slam dunk. The rising tide will lift all these boats.”

Sycamore Networks Inc. of Chelmsford, Mass., which develops optical switching products for phone companies and Internet service providers, is another Net speed bet. Sycamore has streamlined the way data traffic is sent through fiber-optic networks. Though the stock has rocketed sixfold since its October IPO, Smith calls it a “good long-term play.”

As an infrastructure play that some investors might have overlooked, Smith pointed to United Pan-Europe Communications of Amsterdam. “It’s sort of the MCI WorldCom of Europe,” he said.

The continent’s second-largest cable operator also provides data access via cable lines, which “actually makes it kind of a combination of MCI and Excite@Home--but it sells at a lower, cable-operator valuation.” The company is majority- owned by Denver-based UnitedGlobalCom (UCOMA).


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