Markets

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's not been a great week to be an investor in Australian initial public offerings.

On Monday McAleese, a trucking company valued at A$466 million ($351 million) when it debuted in a 2013 stock-market float, suspended its shares and appointed administrators after losing a slew of contracts . The next day Surfstitch, a fashion website listed in 2014 with a A$214 million market cap, plunged 54 percent after forecasting losses and A$99 million of writedowns .

Investors in Australia's equity markets will be forgiven for experiencing a certain Groundhog Day feeling. Of the 112 IPOs worth more than $50 million between the start of 2009 and the end of 2015, 29 have fallen at least 20 percent since they started trading, according to data compiled by Bloomberg. Seventeen have lost more than 50 percent.

Pick a Card, Any Card
The odds of losing big from an Australian IPO are uncomfortably large
Source: Bloomberg
Note: Shows only deals worth more than $50 million between Dec. 31, 2008 and Dec. 31, 2015. More recent IPOs have been excluded as there's not been enough time to establish a proper track record.

Education provider Vocation and electronics store Dick Smith both went the same way as McAleese over the past year, going into administration after less than three years on the market. The country's biggest independent department store chain, Myer, and second-largest broadcaster, Nine, are both down more than 50 percent from their offer prices, as are cattle exporter Wellard and homebuilder Simonds.

Excluding Medibank Private and Aurizon Holdings (two former government assets that have performed rather well since privatization), the A$30.4 billion in capital raised from shareholders in 110 IPOs from 2009 through 2015 has been turned into A$34.6 billion, the data show. That's a gain of about 14 percent over seven years. Buying the S&P/ASX 200 index halfway through the period would have netted more than twice the return.

If the definition of insanity is doing the same thing over and over while expecting a different result, why do Australian investors keep throwing cash at every chancer shopping a hot new stock?

Too Many Cooks
Australia's pension assets are the most outsized relative to the size of its equity markets
Source: Willis Towers Watson, Bloomberg
Note: Pension asset numbers based on Willis Towers Watson's 2015 estimate. Equity market size based on current market capitalizations of the ASX All Ordinaries, FTSE All-Share, S&P/TSX Composite Index, NYSE Composite, and Topix indexes.

One reason is a shortage of alternatives. Thanks to laws mandating that employers pay 9.5 percent of workers' pay into retirement accounts, Australia has the fifth-biggest pension pool globally. Its $1.48 trillion pot is barely shy of Canada's $1.53 trillion, according to Willis Towers Watson, despite a population that's about a third smaller. Japan has five-and-a-half times Australia's population, but its retirement savings come to just $2.75 trillion, less than twice the amount squirreled away down under.

Australians aren't very creative in the ways they invest these funds. They have the highest allocation to equities among the top seven national pension pools, and the second-biggest exposure to domestic stocks after the U.S., according to Willis Towers Watson.

Combine that wall of capital with a heavily concentrated local equity market -- the top 50 stocks on the ASX All Ordinaries Index make up more than two-thirds of its market value -- and inevitably some shares are going to get overvalued. The result is that exasperated investors will end up taking unwise risks in their search for diversification.

There are things Australia could do to bring a bit of sanity to this market. Removing the favorable tax treatment for dividends over bond coupons might encourage investors to allocate more than the current 14 percent they have in fixed-income -- although shareholders are likely to defend that benefit to the death. 

Conditions may grow a little more normal, too, as Australia's population grays -- the median age is 38.3 compared with 46.1 in Japan, perhaps justifying a heavier weighting toward equities.

In the short term, though, there's a simpler lesson: The best investments are the ones people can understand best, and IPOs are normally the ones they understand least. For investors who want to avoid being taken to the cleaners, floats are best avoided -- especially if you're Australian.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Surviving for almost three years is a better outcome than many would have expected. The shares had already fallen 58 percent within three months of the IPO after the government of New South Wales state hauled in its truck fleet for inspection in relation to a fatal crash that occurred while bankers were preparing the share sale.

  2. The stock bounced back a combined 67 percent on Tuesday and Wednesday, though remains below its pre-announcement price.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net