August 18, 2004

Funds for Kids Get Left Back Another Year

Aug. 17, 2004 -- Maybe they need to attend summer school or get a tutor.

Most mutual funds aimed at teaching children about investing or enabling parents to provide for their offsprings' futures got a failing grade when Standard & Poor's looked at them early last year. Since then, the picture hasn't improved much.

Among the group examined in February 2003, all the funds' returns trailed their peers either in 2003, or through the first seven months of this year, or in both periods.

One, Columbia Young Investor Fund/Z (SRYIX), had problems that went way beyond its 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, helping to give young investors in this portfolio a far different kind of lesson.

The fund became a vehicle for rapid market-timing deals, effectively skimming profits from kids and their parents, all while its child-friendly website, www.younginvestor.com, was designed to teach about basic investing concepts and "sound saving 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 in an effort to improve its performance. Towards that end, the team works with a group of 21 analysts, said Karen McColl, Columbia's director of portfolio analysis, who fields questions about its funds from brokers, financial planners and fund rating agencies.

Columbia Young Investor was hurt last year because its technology holdings did not 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, noted 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, versus 28.5% for its peers.

A winner last year among funds geared towards 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, versus 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%, versus 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 childrens' college education while also teaching youngsters about money management.

Two of the company'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 their peers in both periods, as did 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.

Another option for parents or grandparents who want to give gifts to children are irrevocable trusts. Two funds in this category are American Century Giftrust/Inv (TWGTX) and Royce Fund TrustShares/Inv (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 and American Century funds both trailed their peers last year and through July this year.

American Century added portfolio manager David Rose, the former co-manager of American Century Vista/Inv (TWCVX), to Giftrust last March to try to improve its performance.

Giftrust suffered last year in part because it was light in technology stocks, which rebounded in 2003, said 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.

Though the Royce fund has lagged, 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.

But overall, funds aimed at children aren't the best tools for teaching them about investing or providing for their future, financial planners point out. Several labeled funds like Young Investor marketing gimmicks.

Bedda Emous, a planner in North Andover, Mass., said 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, she said. As an alternative, she recommended that parents buy a no-load, broad market index fund that has low expenses, like the Vanguard 500 Index/Inv (VFINX). This type of fund can used as an investment textbook, she said. Once kids learn the basics of managing money, they can move into other assets classes, Emous said.

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 is what we should be teaching our children," he said.

Mitchell Slater, a vice president in Merrill Lynch's private client unit who works with children and their parents, suggested that they work with a financial planner to understand how investing works. Children also have to be taught to diversify their holdings, he added.

"One investment shouldn't be the end all," Slater said.

Fund Name

YTD Returns Thru 7/30/04 (%)

2003 Returns (%)

Standard & Poor's Star Rank

Columbia Young Investor Fund/Z (SRYIX)

-1.7

+27.4

3

Large-Cap Growth Peers

-3.1

+28.5

USAA First Start Growth Fund (UFSGX)

-4.0

+28.7

2

Large-Cap Growth Peers

-3.1

+28.5

Monetta Trust:Blue Chip Fund (MLCEX)

-11.9

+31.8

2

Large-Cap Growth Peers

-3.1

+28.5

American Century Giftrust/Inv (TWGTX)

-4.7

+19.9

1

Mid-Cap Growth Peers

-2.7

+35.5

Royce Fund TrustShares/Inv (RGFAX)

+4.3

+38.1

2

Small-Cap Value Peers

+2.6

+42.3

S&P 500

0.0

+28.7

*Source: Standard & Poor's. Total returns are in U.S. dollars and include reinvested dividends. Data as of 7/30/04

Contact Robert F. Keane with questions and comments at: bkeane@investmentadvisor.com.

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