Hi, my name is Stephen Denichilo, Portfolio Manager at Federated Investors.
What differentiates Federated Kaufmann when it comes to investing in IPOs?
The Federated Kaufmann Funds have been focused on IPOs for almost 30 years. During the last 30 years we believe there's been almost five thousand IPOs. It's safe to assume that the Federated Kaufmann Fund has done research on most of these companies. Our biggest differentiating factor is our longevity and consistency in focusing on this very inefficient part of the market. In addition, the Federated Kaufmann Fund is also involved in the IPO research process long before the start of the IPO, which means that we have an intellectual head start on these companies well before our competition. In addition, this consistency and longevity on focusing on the IPO market really validates our research process by Wall Street's biggest investment banks. These investment banks only give access to IPOs to their best, brightest, most strategic, long-term clients. Federated Kaufmann Funds is at the top of the list.
What sectors seem to be offering the most attractive opportunities? Are there any that you are avoiding?
Today at the Federated Kaufmann Funds we have a keen focus on software-as-a-service companies. These SAAS companies typically have high reoccurring revenue, very high margins, a clean balance sheet, and most importantly, strong free cash flow conversion. When dealing with the new issue IPO, free cash flow conversion and the growth of free cash flow is imperative for a company to self-finance its growth going forward. Conversely, when you're looking at a new issue and you meet very exciting management teams with interesting ideas. If that company cannot show a clear pathway to free cash flow generation we will typically avoid it. It is not uncommon to invest in an unprofitable IPO, but there needs to be a certain clear path that shows that free cash flow conversion is possible in the future. At the Federated Kaufmann Funds we typically steer clear of companies that cannot generate free cash flow, are too capital intensive, or have management teams that are not fully aligned to shareholder's best interests
Views are as of September 6, 2019, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing in IPO’s involves special risks such as limited liquidity and increased volatility. There is no guarantee that Federated’s IPO research process will produce successful results. In addition, there is no assurance that certain growth companies will outperform in any market conditions. Small company stocks may be less liquid and subject to greater price volatility than large company stocks. Past performance is no guarantee of future results. For more complete information, visit FederatedInvestors.com or contact your investment professional for a summary prospectus or a prospectus. You should consider the fund’s investment objectives, risks, charges, and expenses carefully before you invest. Information about these and other important subjects is in the fund’s summary prospectus or prospectus, which you should read carefully before investing. Federated Securities Corp. Distributor 19-40365 (10/19)