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BusinessWeek Investor: Mutual Funds
Hey, Kids, Investing Is Cool!
Firms are rushing to tap the youth market
Investing in mutual funds suits Jonathan Spital's busy schedule. "I'm in school all day, so I let the professionals do the work for me," says the Miami seventh-grader, who relishes a spirited game of roller-hockey after classes let out. Three years ago, Spital, 12, used birthday and allowance money to buy shares of Stein Roe Young Investor. He selected the fund because of its solid record investing in kid-friendly companies and because of its newsletter, which is geared to kids his age. "I like reading the CEO profiles because you're getting information directly from the source," he says. After school, Spital fires up his PC and checks the fund's price on America Online. "I'm a buy-and-hold investor, but I like to see how it's doing," he explains. Says his proud mom Jeanne, a lawyer: "This is a great way to learn about the importance of saving money."
Growing up during a bull market that is older than they are, today's tykes know more about Wall Street than any prior generation. "The bull market has made investing cool," explains David Brady, co-manager of Stein Roe Young Investor. Indeed, many parents and their children discuss the ups and downs of the stock market at the dinner table. Families also have a plethora of teaching tools at their fingertips, thanks to a financial-services industry eager to tap kids' interest in investing.
When Stein Roe Young Investor made its debut in 1994, it was the first mutual fund to cater to kids. Today, at least 70 no-load funds fall into this category, according to the Mutual Fund Education Alliance. And there are many among the broker-sold variety.SMART QUESTIONS. Brokerage firms are getting involved with kids in other ways, too. During the past three years, brokers at Salomon Smith Barney have visited 150 middle schools around the country to talk to students and their parents about investing. The program includes a stock-picking contest, with students in the winning class each receiving a share of Citigroup, Salomon Smith Barney's parent. Merrill Lynch also has teaching materials for its brokers but currently offers no formal classroom programs.
Keeping up with the growing sophistication of young investors is no small challenge. Mindy Ross, a marketing executive at Salomon Smith Barney, says the firm's Young Investors Network Web site (www.salomonsmithbarney.com/yin) is poised for an overhaul for just that reason. "Kids used to ask us basic questions, like how do you read stock tables," she reports. "Now they want to know what's the significance of a stock being listed on Nasdaq, instead of the New York Stock Exchange."
Brokers hope that investing in the younger set will provide big returns. "The financial-services industry realizes that its future health relies on instilling good investing habits in kids," says Michelle Smith, a managing director for the Mutual Fund Education Alliance. Of course, catering to small fry is also a way to cultivate business with parents.
That said, many of the educational materials from financial-services firms are top-notch. And you don't necessarily have to be a customer to make use of them. For instance, anyone with a PC can access Salomon Smith Barney's kids' Web site. Stein Roe's site, Young Investor (www.younginvestor.com), also offers solid investing information, and any fifth-, sixth-, or seventh-grader can participate in the investing-essay contests that are sponsored by the fund. Only shareholders, however, receive the fund's quarterly Dollar Digest newsletter.
There's nothing like helping a child to buy shares in a kid-friendly mutual fund or stock to engage them in the learning process. "Kids can read the annual report and follow the company in the news," says Christopher Cordaro, a financial planner in Chatham, N.J. That's why Cordaro recently set up a family investment club for his three daughters, who range in age from 5 to 9. The girls, he says, are "Nickelodeon junkies" and so are making Viacom--Nick's parent company--their first purchase.
Get the kids interested in investing, and they may come to prefer stocks or funds as gifts, instead of toys. Well, maybe not, but the Monetta Family of Funds came up with a novel plan: When an adult opens an account for a child in its Monetta Express program, the fund company sends the young shareholder "Steady Eddy," a colorful bean-filled train engine. For each additional $500 invested, kids receive a train car until they complete a set of eight. Monetta also sends young shareholders storybooks and a coloring book that features investing themes.
The majority of kid-friendly funds simply lower their investment minimums for custodial accounts--some to as low as $20--making it easy for a child to invest his or her allowance or baby-sitting money. In this category, three excellent large-cap stock funds that parents should consider, says John Markese, president of the American Association of Individual Investors, are Harbor Capital Appreciation, Invesco Blue Chip Growth, and Vanguard Growth Equity (table.) The Vanguard offering, for instance, lowers its normal $10,000 minimum investment to $1,000 for custodial accounts. An adult can establish a custodial account for a child. Anyone can contribute to the account, but the child owns the money, which he or she can tap upon coming of age.
Some funds further invest in companies whose products and services kids use, like McDonald's and Disney. About a dozen or so of these funds also offer educational materials. You can find a list of kid-friendly funds at the Web site of The Mutual Fund Education Alliance (www.mfea.com).
Among the funds that do it all, two standouts are Stein Roe Young Investor, which has had an average return of 19.8% annually over the past three years, and USAA First Start Growth, which has averaged 22.8% yearly over that same period. Both funds seek stocks of kid-oriented growth companies, although not exclusively.YOUNG IDEAS. Both funds also stress that teaching kids is as important to their companies as good returns. The USAA fund, for instance, welcomes investing ideas from its young shareholders. Stein Roe Young Investor's portfolio managers regularly hold online chat sessions with their more than 230,000 shareholders. "The basic lesson we are trying to teach is the difference between saving and investing," Stein Roe's Brady explains. "We tell kids that because they have a long time horizon, they can handle the risks of owning stocks, which offer superior returns over time." Stein Roe Young Investor will open a new account with as little as $100, provided the shareholder agrees to invest at least $50 every month. USAA's First Start Growth will open an account with $20--as long as you are willing to make monthly investments of at least $20.
When selecting a mutual fund for the kids, "don't be seduced simply by the educational materials," cautions Amy Granzin, a senior analyst at Morningstar. Choose a fund for the kids the same way you would any other fund--look for a solid track record and low expenses. That's a lesson worth teaching the kids as well.By Susan ScherreikReturn to top