Though Not Quite Child's Play, Portfolio Offers Something New

RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds.

With something on the order of 5,000 mutual funds available today, it's getting harder for fund companies to come out with unique products or services.

But a new portfolio from Chicago-based Stein Roe Mutual Funds does just that, and it also manages to target a neglected shareholder group: children.

The Stein Roe Young Investor Fund, which opened May 9, has a dual mission. It sees itself as a vehicle for financing a child's future college education and as a way to get youngsters excited about the investment process.

The first angle is nothing new. All sorts of mutual funds can be used for college planning. Equity funds in particular work well for younger children because of the greater long-term returns associated with the stock market. More conservative bond and even money market portfolios make sense for teens who know they will need to drain the account within a couple of years.

The second angle, of trying to involve kids in the investment process, is unusual.

"Education that deals with investing, mutual funds and financial planning is underrepresented at the high school and junior high levels," says Kenneth W. Corba, one of the three portfolio managers for the Young Investor Fund and a former high school English teacher.

Corba says his first definition of success with the Young Investor Fund would be to outperform the Standard & Poor's 500 index.

"After that, I'd like to light a spark or create an interest among kids in the stock market and individual companies around them," he says.

The main way Stein Roe intends to do this is by holding recognizable stocks in the portfolio, especially "companies that appeal to or affect the lives of children or teen-agers," as the prospectus, or legal disclosure document, puts it.

Three of the bigger holdings--Procter & Gamble, Microsoft and Motorola--show that management reserves the right to interpret its mandate liberally. But more identifiable kid-related stocks such as Toys R Us, McDonald's, Walt Disney Co. and Coca Cola have also been included.

Most of the holdings will be large growth companies characterized by higher profitability and lower dividend yields than the Standard & Poor's 500. But the fund isn't restricted from owning smaller stocks.

"We're even looking to get some small-stock ideas from kids," says Corba.

The fund's budding capitalists will get a quarterly newsletter and an expanded annual report featuring games and articles designed for young investors. Other odds and ends will include an investment primer for teens and adults, and a short financial coloring book for younger children.

The fund's prospectus, it should be noted, is a bit easier to read than many such documents but is hardly Dr. Seuss material.

The Young Investor Fund is marketed directly by Stein Roe ((800) 403-KIDS), without a sales charge or load. The company estimates the fund's operating expenses will run 1% annually, which would make it a bit less costly than the average growth-stock portfolio.

The minimum investment is $2,500, or $1,000 in a Uniform Transfers to Minors Act account, which is applicable in California.

UTMAs are an easy way to hold assets in a child's name under the supervision of a parent or other adult custodian. The money in the account, even if given by an adult, becomes the kid's property, which means he or she might decide not to use it for educational purposes.

The child gains access to the money upon becoming an adult. Before then, the custodian oversees the account.

There is a potential tax advantage to putting assets in a child's name. Depending on the youngster's age and investment income, some or all of that income might be tax-free, and the rest could be taxable at the child's lower rate.

Stein Roe's product joins a short list of funds that have been designed for under-age shareholders. Of these, Twentieth Century Giftrust, based in Kansas City, Mo., remains the most unusual.

This no-load fund gives new meaning to the idea of investing for the long haul. Money placed in the fund can't be touched for 10 years or until the child becomes an adult, whichever is further down the road. Donors can specify even lengthier investment commitments.

Because of these restrictions, Giftrust ((800) 345-2021) has been slow to catch on. It counts just $179 million in assets despite having the No. 1 performance record for any mutual fund over the 10 years through March 31, 1994. The fund holds aggressive growth stocks for which a long horizon is generally desirable. The minimum investment is $250.

One more wrinkle: Giftrust itself, rather than parents or kids, pays the taxes on yearly dividends and capital gains out of the fund's assets.

Twentieth Century also has a separate UTMA plan, in which the company will automatically shift an investor's money from its Select stock fund to a money market portfolio as the youngster nears college age.

A few other mutual fund groups offer college planning incentives, typically in the form of lower minimum investments.

For example, Boston-based Fidelity Investments ((800) 544-8888) drops the normal $2,500 minimum on its Asset Manager, Blue Chip Growth and Growth & Income funds to $1,000 for people setting up UTMA accounts. It also waives the normal 3% sales charge on the latter two funds (Asset Manager is a no-load portfolio anyway).

Fidelity shareholders willing to set up an automatic investment plan can participate for as little as $100.


The Investment Company Institute has proposed voluntary guidelines that it predicts will help eliminate confusion over inconsistent use of A, B, C and D classes of shares among fund companies.

The Washington-based trade organization is recommending that front-end load funds be designated as A shares, while B shares would be those on which an investor pays a 12b-1 fee in combination with a declining back-end charge. The C and D shares would be two alternate types of "level-load" pricing schemes making use of 12b-1 fees; a front-end charge would apply to the D shares but not the C.

There also would be less-costly X and Y classes of shares, reserved for institutional investors and fund company employees, respectively.

Still confused? Then consider no-load funds, on which multiple classes of shares don't apply.


The stock market might still look expensive to a lot of people, but fund companies continue to introduce new portfolios with a bargain-hunting slant. One such product is the 4-month-old John Hancock Special Value Fund, headquartered in Boston but managed by Charles H. Womack of NM Capital Management in Albuquerque, N.M.

Despite an emphasis on neglected, out-of-favor stocks trading at low price-to-book values, Womack says he's still finding plenty of companies in which to invest. Favorites include Boeing, Precision Castparts, Adolph Coors and the Brown Group.

Womack says some of the better buys are among smaller stocks. "That's where we're finding the values."

He's also predicting upside earnings surprises this year and next.


The Vanguard Group of Valley Forge, Pa., is offering a free 20-page booklet that outlines the basics of asset allocation. The publication illustrates long-term risks and returns for various asset categories, using information compiled by Ibbotson Associates of Chicago. The "Vanguard Investment Planner" can be ordered by calling (800) 523-8552.

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