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February 19, 2003 at 07:00 PM
Feb. 14, 2003 — Thanks to the now-departed bull market, parents want to make sure little Johnny can not only read, but understand P/E ratios and the value of compounding, too.
Mutual fund companies have attempted to fill that void, rolling out funds designed to let children learn as they earn and allow parents to give them a growing nest egg they can later access to finance everything from education to retirement. But has the performance of these funds justified the extra costs or restrictive structures their shareholders must often deal with? Fund Advisor decided to review the available options and suggest other ways to accomplish the same goals.
Funds for children can be divided into two types: Those set up as irrevocable trusts, for parents and others looking to give a gift, and funds that provide educational newsletters and other bells and whistles to teach children about saving and investing.
There are two trust-structured funds, American Century Giftrust/Inv (TWGTX) and Royce Fund:Trust & Giftshares/Investor (RGFAX), and both require long lock-up periods: American Century’s fund must be held for at least 18 years, while Royce mandates a minimum holding period of at least 10 years, or until the beneficiary reaches the age of majority, whichever is longer. Many donors decide to establish the trust for far longer stretches. “They’re often set up with a 20-40 year time frame,” says Chris Doyle, spokesperson for American Century. “Some are even [designated for the child's] retirement.”
That kind of commitment requires a lot of faith in not just the fund’s current portfolio manager, but the organization behind him — the typical fund manager is lucky to stay on the job for five years. Unfortunately, American Century Giftrust, which opened in 1983, hasn’t justified that faith in recent years. The fund was fast out of the gate, gaining more than 20% per year in its first decade of operation, according to data from Standard & Poor’s. But then money started pouring in (assets swelled to nearly $2 billion by 2000), and performance suffered: Giftrust trailed more than three-quarters of its mid-cap growth peers in five out of the six years between 1996 and 2001. Several investors successfully sued to break their trusts and get out of the fund early. American Century brought in a less-aggressive management team in mid-2001, and performance improved, at least on a relative basis. But Giftrust has a long way to go to prove itself again.
The story is more encouraging for Royce’s fund. Trust & Giftshares (run by small-cap value veteran Charles Royce, who started his firm 30 years ago) has soundly beaten its small-cap value peers in each of the past five calendar years. Unlike American Century’s fund, donors can select one trust option that allows beneficiaries to withdraw funds for educational expenses. And size isn’t a problem — despite its strong performance, the fund has just $29 million in assets. “It’s really a niche product,” says Cheryl Leban, Royce Funds’ Giftshares specialist. Because of that, Leban is able to give personalized service: Besides writing quarterly letters to donors, she answers their questions by phone and e-mail. That was a big help in 2001, when Royce sold the company to Legg Mason, and Leban quickly assured donors that there would be no changes — Royce and the firm’s other portfolio managers signed five-year contracts. Of course, what happens after the 63-year-old Royce retires is another question. Still, this is the more promising of the two trust-fund choices.
