A Mutual Admiration Society

Kiplinger's Personal Finance Magazine, August, 1999 by Janet Bodnar

Funds courting kids' money are teaching good investing habits, too.

Dear Janet: I have heard about several mutual funds that are appropriate for kids because the companies they invest in are known to children and the investment amount is a bit lower than most. Can you help?

--CRAIG FULTON, via e-mail

Kid-focused mutual funds are a small flicker in the firmament of funds. But they're attracting lots of attention from readers like Craig Fulton, and their niche is expanding.

About a half-dozen companies earmark one or more of their funds for kids by spelling out a distinctive investment philosophy, setting a low initial minimum for custodial accounts or providing educational materials for young shareholders. And their returns aren't bad.

A marketing gimmick? Perhaps, but if so it's one of the better ones. "You want to expose people to good investing habits as early as possible, and this is one way to do it," says Sheldon Jacobs, publisher of The No-Load Fund Investor.

Almost by definition kids are investing for the long term: They have time to ride out stock-market downturns and reap the superior returns stocks often If you are investing on behalf of a child, focus less on single-year performance than on fund quality in general (see the rankings that begin on page 104 for fund details).

Here's the lineup of kid-oriented funds:

* Stein Roe Young Investor ($1,000 minimum for a custodial account, or $100 with an automatic investment plan of $50 per month; 800-338-2550). Started in 1994, the pioneer in kid-focused funds marks its fifth anniversary this summer by waiving its minimum through July 30.

The fund is committed to investing 65% of its portfolio in stocks that affect the lives of children and teenagers, but "about 99% of companies fit that description," says Erik Gustafson, who manages the fund with David Brady. Young Investor owns stocks you would expect to find in such a portfolio--Cola, Disney and Procter & Gamble, for instance--and some you might not, such as Citigroup, Walgreens and Global TeleSystems Group, a European telecommunications company. With more than 60% of its holdings in large companies, the fund's one-year total return of 13.7% to June 14 trails Standard & Poor's 500-stock index (19.9%). But its annualized five-year return beats the index 26.3% to 25.6%.

Stein Roe recently started a new fund, Growth Investor, with holdings identical to Young Investor's but with a lower expense ratio--1.1% vs. 1.31%--for people who don't want Young Investor's educational materials: an "owner's manual" explaining the principles of investing, an activities book for kids ages 3 to 12, and Dollar Digest, a colorful quarterly newsletter.

* USAA First Start Growth ($250, or $20 a month; 800-235-8377). The newest fund to be directed toward kids, two-year-old First Start Growth has skipped past the S&P, with a one-year total return to June 14 of 27.9%. The fund's prospectus requires it to steer clear of alcohol, tobacco and gambling stocks, but manager Curt Rohrman can invest in any other companies that are familiar to kids. About 80% of his portfolio is in large-company stocks, including America Online, the CVS drugstore chain and Clear Channel Communications, which Rohrman says "owns the radio stations kids listen to."

He manages three other USAA funds, but First Start is a different animal, says Rohrman. With First Start, he has close contact with young shareholders. Their investment ideas appear in a monthly newsletter that is part of USAA's money-management program for kids. And Rohrman even peruses Seventeen magazine for stock tips (that's where he found Steve Madden, a company that makes trendy platform shoes).

* American Express IDS New Dimensions ($500, or $50 a month; 5% load; 800-437-4332). Not strictly a kid-focused fund, New Dimensions already had a 30-year track record when American Express chose it two years ago as the flagship of its Kids, Parents and Money program. "We needed a long-term investment as the foundation, and we went with the fund that had performed well through thick and thin," says Jan Holman, vice-president of investment services for American Express. In the year to June 14, New Dimensions' total return of 19.9% matched the S&P 500's, and its three-and five-year annualized returns--22.5% and 22.9%--came close.

Like Young Investor and First Start, New Dimensions leans toward big, well-known companies: Cisco Systems, Wal-Mart, General Electric, America Online and Microsoft are its top holdings. Manager Gordon Fines "doesn't go out and look for kid stuff," says Holman. "He looks for investment opportunities." New Dimensions comes with educational materials for kids, including a quarterly newsletter.

* Invesco ($250, or $25 per month; 800-525-8085). As part of its Driving Into Your Financial Future (DIFF) program for kids, Invesco makes special low minimums available on custodial accounts in four diverse funds. The one most directly comparable to other funds in the kids' niche is Blue Chip Growth. To June 14, it had a sizzling one-year return of 25.2%, and on a three-year basis it lagged the S&P 500 only slightly.