Fund With Dick and Jane

L.A. Times Archives

Sept. 2, 1997 12 AM PT

SteinRoe Young Investor is helping to make a lot of kids richer.

This unusual mutual fund, which targets underage shareholders, has risen 135% over the last three years. It focuses on blue-chip companies that are recognizable to children--stocks like Mattel, Microsoft and McDonald’s. In particular, portfolio managers Erik Gustafson and David Brady have been going to school on the global-consumerism theme.

The fund pursues the dual objective of trying to make investing educational as well as profitable. It does this with prospectuses, shareholder reports and other materials that even a kid could read.

In addition, Gustafson and Brady encourage shareholders to write letters expressing their ideas on making money. Many adults also seem to view the fund as a good way to learn about investing--they represent one-quarter of all shareholders.

A $100 initial minimum makes it easy to get started for people who agree to sock away at least $50 a month until their accounts hit $1,000. Otherwise, a $2,500 minimum applies.

Gustafson, a 34-year-old former securities attorney, has guided the fund since its inception in April 1994. Brady, 33, joined one year later. They also manage the SteinRoe Growth Stock Fund, which has earned a three-star rating from researcher Morningstar Inc. The two talked to Russ Wiles, a mutual fund columnist for The Times.

Times: This fund has a different appeal with its focus on kids as investors. How do you screen companies to meet this theme?

Gustafson: At least 65% of the fund’s assets have to be invested in companies that are familiar to or relate to young people. You might think that this limits our financial horizons. In fact, it does not. Companies that [affect] the lives of young people are many and varied. They range from Mattel and Wrigley to Motorola, the largest holding in the fund and a firm that directly [affects] the lives of young people through its wireless communications products.

Brady: We invest in high-quality growth stocks. We keep about 60% of the portfolio in large stocks, 20% in mid-caps and 20% in small stocks. The idea is to have the large stocks provide steady growth, with the medium and smaller companies contributing upside potential.

Times: So why pursue kids and teens as shareholders?

Brady: Our parent company, Liberty Financial, conducted a study years ago on junior high school students’ interest in and understanding of money and investing. It found that kids were highly interested but had a low level of understanding. The topic wasn’t being taught in classrooms. A lot of parents didn’t have a good grasp of the subject, either. So we felt there was a need for a fund that provided education for shareholders, along with a better rate of return than that paid by traditional kid investments like U.S. [Savings] Bonds.

Times: I assume there’s some leeway in deciding which companies affect the lives of youngsters. Brady: When we started the fund, we were concerned that we would be limited by our objective of holding stocks that kids could understand and relate to. But in Dollar Digest, our quarterly newsletter to shareholders, we encourage them to write in with their ideas for making money. These range from how to build a better lemonade stand to which stocks they would like to see in the fund. We have received blanket recommendations from 13-year-olds that we should own more technology stocks. They don’t just cite Wrigley, McDonald’s and other obvious choices. It’s through these letters that we have come to realize our investment universe is broad.

Gustafson: Our screening process focuses on companies that are familiar to young people, but we also have a mandate to make money for shareholders. We aren’t going to sacrifice that ultimate objective just to pepper the fund with companies that are immediately familiar to everybody as being relevant to young people.

Times: Have you ever bought a stock based on a tip from a young shareholder?

Brady: No, but we’ve spent a lot of time researching stocks that they have written about.

Times: What percentage of your shareholders are minors?

Gustafson: About 75% of the accounts are [custodial] accounts for minors. We have over 100,000 shareholders.

Times: Does that mean the other 25% is held by adults?

Gustafson: Yes. We’ve found that many adults need to learn about financial services and the financial markets too. We have discovered a great acceptance among some not-so-young investors.

Times: So given your investor base, is this a fun fund to manage?

Gustafson: Absolutely. Dave and I also work on the SteinRoe Growth Stock Fund, a portfolio that focuses only on large, high-quality growth companies. Young Investor gives us a wider horizon. It allows us to expand into smaller companies.

Times: This is a team-managed fund. How do you two interact?

Brady: We sit right next to each other. We interact on every stock that goes into or out of the portfolio. We both do individual analysis of stocks, and we rely heavily on SteinRoe’s research staff. We both have our own contacts on Wall Street, in and out of the industries and companies in which we invest.

Times: The fund has had a pretty good record in its short life by focusing on large stocks. Do you think these companies might be in some danger right now? It seems that many of them are going through a correction.

Gustafson: Clearly, some of our large consumer companies have dropped a bit, with unfavorable announcements coming out of Coca-Cola and Gillette, two of our holdings. But we are not short-term or momentum investors. We take a very long-term view with our investment strategy.

One of our themes is global consumer franchises--companies that generate a significant portion of their earnings and revenues from overseas. We firmly believe that as the world continues to modernize, it will continue to Americanize. As disposable incomes go up around the world, people want to drink Coca-Cola, eat McDonald’s hamburgers, use Gillette razors, brush with Procter & Gamble toothpaste and watch Disney movies.

All of those companies are current holdings. They are the foundation on which the portfolio is built. Those stocks have been great performers for the last three years, but over any short-term period they can move out of favor. I think we’re in one of those phases right now. Over the long haul, we feel this is a place where we are going to make money for shareholders.

So we’re sticking to our knitting. We haven’t sold a share in any of those stocks.

Brady: This isn’t the type of portfolio where we’re going to change our colors and buy cyclical stocks. We know Coke is a terrific company. The fundamentals are outstanding--as strong as they’ve ever been. But perhaps the stock will under-perform the market for three or six months or even a year. Our hedge against large stocks going out of favor is that we also own some medium and smaller shares.

Times: Are you concerned that the rising dollar might eat into the profits of U.S. multinationals?

Gustafson: This is a short-term phenomenon that will hurt earnings for large U.S. multinationals. But we’re not concerned about the strong dollar over the long haul.

Times: Speaking of under-performing, the fund was in the top quartile in 1995 and 1996 but has dropped this year. Any reason for that?

Gustafson: The first quarter was rough. Our small-stock holdings didn’t perform well. Those stocks have been out of favor. But we returned to the top quartile in the second quarter, and we have picked up ground on the Standard & Poor’s 500 in August. This reflects our small- and medium-cap holdings doing better.

Times: You mentioned global consumerism. Are any other broad themes propelling your selections?

Gustafson: One of our other themes is communications and information. We are in the Information Age, and we think companies that provide communications and telecommunications equipment are very attractive right now.

We like Motorola, for instance, for its full line of wireless products, from cellular and wireless phones to pagers. They also have a large semiconductor business that has turned around this year. That turnaround, combined with the outstanding prospects for wireless equipment in general, will push this stock much higher as we move into 1998. Another stock we own in the telecom equipment sector is Tellabs, which makes digital switching systems for phone companies.

Times: Is there a young-investor connection there?

Gustafson: Not so much as with McDonald’s. But clearly young people are aggressive, sophisticated users of communications equipment.

Brady: Anything that allows telephones to work better is a green light for this Young Investor fund.

I have a 13-year-old daughter who spends quite a bit of time on the phone and quite a bit of time running around on the Internet. Maybe kids haven’t heard of Cisco Systems, a leader in the data-networking industry. But when we describe the company in our annual report, in easy-to-understand English, as a firm that makes data move faster along phone lines, they can relate.

Every company might not be completely obvious as a kid’s stock, but remember we have an education objective. If we just bought bubble gum companies, we wouldn’t be making it educational.

Times: The fund also has leeway to invest up to 25% of its assets in foreign stocks. Are you doing that now?

Gustafson: No. We have only about 5% in foreign assets. We’re finding plenty of attractive ideas here in the U.S.

Brady: The idea is to buy Coca-Cola and rely on the 80% of its operating profits that are generated outside the U.S. We participate fully in the world’s growth through multinational companies, for which we get U.S. accounting standards and can talk to their managements easily, with no language barriers. We leave [true] international investing to the international experts.

Times: What’s your outlook for the U.S. stock market?

Gustafson: We’re very optimistic long term. On an economic front, we have reached “Greenspan nirvana”--sustainable yet noninflationary growth. On a demographic front, 80 million baby boomers continue to pile money into the stock market. And on a competitive front, U.S. corporations are the finest in the world. Overlay all this with the realization that freedom and entrepreneurial capitalism are breaking out around the world and you can see why we’re very optimistic on the long-term health of U.S. companies.

Brady: Still, we do expect that the market longer term will deliver something closer to what it has achieved historically, which are returns of 8% to 10% annually. That compares with gains of nearly 20% annually on average for the S&P; 500 over the last 15 years.

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SteinRoe Young Investor Fund

Strategy: Seeks capital appreciation, primarily by investing in blue-chip companies that affect the lives of children or teenagers.

Vital Statistics

Year-to-date return: +15.9%

Avg. general U.S. stock fund, YTD return: +19.1%

12-month return, through June 30: +21.2%

Avg. general U.S. stock fund, 12-month return, through June 30: +22.0%

3-year return, through June 30: +135.0%

Avg. general U.S. stock fund, 3-year return, through June 30: +85.3%

Five biggest holdings as of June 30: 1. Mattel, 2. Motorola, 3. Johnson & Johnson, 4. Microsoft, 5. Intel

Sales charge: None