Page 1 of 2

Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazine.

Gaining a decent stock allocation in a tightly-held initial public offering (IPO) has helped some funds improve returns over the years, but there were hardly any suitable small-cap industrial floats in 2011, and the 2012 outlook is even worse.

Investors can expect few easy wins in this year's IPO market.

IPO volumes were up last year, but most were for tiny exploration stocks that small-cap funds typically avoid.

Ninety-two small-cap companies (market capitalisation less than $100 million) listed in 2011, up 10 per cent on 2010, the HLB Mann Judd "Small Cap IPO Watch" report shows.

The average share price loss against the issue price was 12 per cent, slightly better than the broader market.

Total capital raised by small-cap companies in 2011 was down 17 per cent on 2010 and the average raising was $6.84 million, the lowest in five years, according to the report released this week.

The average value of all floats in 2011 at listing was just $25 million, Investor Weekly research shows.

Simply put, most floats in 2011 were too small, illiquid and speculative for small-cap funds that usually favour floats of larger established, profitable industrial or mining services companies.

Australian equity mid-to-small growth funds are slightly underperforming the same style of large-cap funds, Morningstar research shows. They lost 14.7 per cent compared to 12.6 per cent for large-cap funds in the year to 31 December 2011.

Small-cap growth funds have had more than double the returns of large-cap growth funds over three years, and outperformed them over five and 10 years.

The big question is whether the recent underperformance of small-cap growth funds will continue.

The absence of IPOs will not help.