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By Richard Diennor Most mutual funds aimed at teaching children and their parents about investing for the future received a failing grade when Standard & Poor's looked at them early last year. Since then, the picture hasn't improved much. The returns of all the funds examined in February, 2003, either trailed their peers in 2003, or through the first seven months of 2004, or both.
One such fund, Columbia Young Investor Fund/Z (SRYIX
), had problems that went way beyond its performance numbers. In February, federal and New York State regulators filed civil-fraud charges against Columbia Funds, alleging that it engaged in improper fund trading. Columbia's parent, Bank of America (BAC
), later paid $675 million to settle the charges, giving young investors in this portfolio a different kind of lesson.
REFORM SCHOOL. The fund became a vehicle for rapid market-timing deals, effectively skimming profits from kids and their parents, even though Columbia's kid-friendly Web site, was designed to teach children about basic investing concepts and sound savings habits. As if being involved in the scandal weren't troubling enough, investors in the fund have still had to contend with lackluster performance.
Columbia turned the fund over to three new portfolio managers in June, 2003, to try to improve its performance. Toward that end, the team works with a group of 21 analysts, says Karen McColl, Columbia's director of portfolio analysis. McColl fields questions about Columbia Funds from brokers, financial planners, and fund-rating agencies.
Columbia Young Investor was hurt last year because its technology holdings didn't perform as well as those in the fund's benchmark, the Russell 3000 index. The fund, which seeks established, financially sound companies, was also held back in 2003 because these businesses were being overlooked by investors, who were chasing lower-quality companies, notes McColl.
This year through the end of July, Young Investor has shed 1.7%, edging out its large-cap growth peers, which dropped 3.1%. It returned 27.4% in 2003, vs. 28.5% for its peers.
NO GROWTH SPURT. A winner last year among funds geared to children was USAA First Start Growth Fund (UFSGX
). The portfolio, which is run by well-known stock-picker Tom Marsico, gained 28.7% in 2003, vs. 28.5% for its large-cap growth peers. But the fund has run behind similar offerings through the first seven months of 2004, losing 4%, vs. a decline of 3.1% for its peers.
Similar mixed results were churned out by the Monetta group of funds, which offers an investment program aimed at encouraging parents to save for their children's college education while also teaching kids about money management.
Two of Monetta's stock funds, Monetta Trust: Blue Chip Fund (MLCEX
) and Monetta Trust: Mid-Cap Equity Fund (MMCEX
), topped their peer groups in 2003 but trailed them through the first seven months of 2004. Two other stock funds, Monetta Fund (MONTX
) and Monetta Trust: Select Technology Fund (MSCEX
), lagged behind their peers in both periods. Another laggard was Monetta Trust: Balanced Fund (MBALX
), which invests in both equities and fixed-income securities.
Monetta's bond fund, Monetta Trust: Intermediate Bond Fund (MIBFX
), edged out its peers last year. But its 0.5% return through this year through July was slightly behind the 0.6% gain recorded by the average high-quality intermediate-term bond fund.
LONG LOCK-UPS. Irrevocable trusts are another option for parents or grandparents who want to give gifts to children. Two funds in this category are American Century Giftrust (TWGTX
) and Royce Fund Trust Shares (RGFAX
). Both have long minimum holding periods. American Century's fund must be held at least 18 years and Royce mandates a minimum lock-up period of 10 years.
The Royce Fund trailed its peers in 2003 but is ahead of them so far this year through July. The American Century fund trailed its peers both last year and through July, 2004. American Century Giftrust suffered last year partly because it was light in technology stocks, which rebounded in 2003, says Jim Charles, who deals with institutional and individual investors for American Century. The fund was weighed down in the first quarter of 2004 by its industrial stocks. American Century added portfolio manager David Rose, the former co-manager of American Century Vista (TWCVX
), to Giftrust last March to try to improve its performance.
Though the Royce fund has lagged recently, it has a strong long-term record. Managed by small-cap value veteran Charles Royce, the fund has beaten its peers over the past five years on an annualized basis.
WRONG LESSONS. Overall, financial planners say funds aimed at children aren't the best tools for teaching them about investing or providing for their future. Critics say several labeled funds are marketing gimmicks. Bedda Emous, a planner in North Andover, Mass., says any parent who buys such specialized funds "qualifies as a sucker."
These types of funds tend to be overly concentrated in large-cap growth stocks, Emous adds. As an alternative, she recommends parents buy a no-load, broad market-index fund that has low expenses, like the Vanguard 500 Index (VFINX
). It can be used as an investment textbook, because once kids learn the basics of managing money, they can move into other assets classes, she says.
Russell Wild, a planner in Allentown, Pa., expressed similar sentiments. "Study after study shows that low-cost indexing is the best investment strategy, and that's what we should be teaching our children," he says.
Mitchell Slater, a vice-president in Merrill Lynch's private-client unit who works with children and their parents, suggests they work with a financial planner to understand how investing works. Children also have to be taught to diversify their holdings, he says, adding "one investment shouldn't be the end-all."
YTD Return Thru 7/30/04 (%)
2003 Total Return (%)
Columbia Young Investor Fund/Z (SRYIX)
Large-Cap Growth Peers
USAA First Start Growth Fund (UFSGX)
Large-Cap Growth Peers
Monetta Trust:Blue Chip Fund (MLCEX)
Large-Cap Growth Peers
American Century Giftrust/Inv (TWGTX)
Mid-Cap Growth Peers
Royce Fund TrustShares/Inv (RGFAX)
Small-Cap Value Peers
Diennor is a reporter for Standard & Poor's Fund Advisor