Diary Of A Private Investor: Golden offerings that flatter to deceive

Beware of the cosy links between advisers and favoured friends

If I had been in charge of a big pension fund and on the Christmas card list of the advisers to Intechnology, a company that provides engineering systems and drilling services to oilfields around the world, when it became a quoted share on the London Stock Exchange less than nine months ago, I would be a happy man today. A call from the advisers would have given me the opportunity to participate in the placing of the shares, which were issued at 25p. Suppose I had invested £90,000.That would have bought me 360,000 shares, which this week would have been worth £1.3m. Not bad, eh?

If I had been in charge of a big pension fund and on the Christmas card list of the advisers to Intechnology, a company that provides engineering systems and drilling services to oilfields around the world, when it became a quoted share on the London Stock Exchange less than nine months ago, I would be a happy man today. A call from the advisers would have given me the opportunity to participate in the placing of the shares, which were issued at 25p. Suppose I had invested £90,000.That would have bought me 360,000 shares, which this week would have been worth £1.3m. Not bad, eh?

Now suppose I am just ordinary Terry Bond, private investor, but a year ago I was a client and friend of the stockbrokers Williams de Broe when they arranged the private placing of shares in Aquarius Platinum. Again, my allocation was £90,000 worth - 180,000 shares at 50p. This week my holding would be worth upwards of £280,000. Well over 500 per cent uplift in a year.

Let us now consider a couple of other real-life scenarios. Were you one of the thousands of investors, caught up in new issue fever, who stood in the queue to buy shares in Interactive Investor at the issue price of 338.5p? If you had been able to lay your hands on £90,000 worth at that price today, 10 months later, you would have lost all but £11,800 of your money. And if you had stuck your £90,000 into Web Shareshop just over two months ago it would have fallen to less than £30,000 this week. Indeed, it was down around that level after just one month of trading, which is ironic when you consider that this company is dedicated to arranging initial public share offerings to the public via the Net.

Admittedly these examples are at the top and bottom ends of the success and failure league table for new issues. But behind them lies a scandal that has to be addressed by the London Stock Exchange if it is to retain any credibility with private investors.

When a company decides to obtain a share quotation on the Stock Exchange, either on the main market or the Alternative Investment Market, it has three choices. The share issue can be restricted to an institutional placing with huge chunks being allocated to pension funds and the like. There can be a private placing, where the stockbroker arranging the flotation gives his best clients a chance to get in before the masses. Or there can be the bunfight which was favoured by Interactive Investor and Web Shareshop, where all and sundry throw their cheques into the ring hoping to make a quick killing.

I am indebted to a magazine called Growth Company Investor, which has researched the flotation methods and present-day results of 200 UK companies that have come to the stock market in the last 12 months. Inevitably most were on AIM but there were a number on the main market. The new issues, that were restricted to institutions and the chosen few private client investors, have gone up by an average 54 per cent. The new issues that were offered to all and sundry have gone down by an average 18 per cent.

It suggests to me that when it comes to a restricted flotation the price is set at a more-than-reasonable level, so when general trading starts, ordinary investors pile in and the price climbs quickly. The institutions and the favoured few are sitting on instant profits. This makes certain that the cosy relationship between the advisers and their best friends is preserved for future issues. Conversely, when there is an open offer on a new issue and the price drops immediately trading starts, it suggests to me that in the City's opinion the share was over-valued in the first place.

Disgusting? Of course it is. Unfair? Yes, indeed. I believe it is up to the Stock Exchange to revisit the whole question of new issues, and this time they should include private investors directly in the decision-making process rather than playing lip service to them by simply considering written submissions then doing their own thing.

Meanwhile, my advice is to think long and hard before you rush into subscribing to open-offer new issues. An average drop of 18 per cent when, at the same time, the AIM index went up 35 per cent means you must be ultra-careful.

***

A couple of weeks ago I mentioned my bad back - currently in remission. I have received several e-mails from fellow sufferers, so thank you for your sympathy and good wishes.

One was from Jeff Jackson who wrote: "Dear Terry, I hope your back is feeling a lot better. You wrote a while back that investors shouldn't have more than about 10 companies in their portfolios, that more than this would make proper tracking difficult. If I have a portfolio of 10 companies, and cash to invest, are you suggesting I invest in an existing favourite rather than another potentially better bargain? Your advice would be appreciated."

This rule of 10 stocks is not an exact figure. Coincidentally I was discussing it with a group of investors at an investment club seminar in Chester on Sunday and we agreed that a figure of between six and 12 was ideal. The reason, as you know, is that close and constant monitoring of your portfolio is vital and the figure you choose should be the one that best suits you and the time you have available.

When you have additional funds to invest either (a) buy more of the same or (b) if you have found a potential new investment that you think is going to perform miracles, drop your least favoured share from your existing portfolio and replace it with the new one.

terry.bond@hemscott.net