If you’re like most parents or grandparents, you’ve probably tried a number of ways to teach your kids the importance of managing their money. Allowance, lemonade stand, piggy bank — all simple classics. Some people even buy a single stock, then teach their kids to follow it.
What you probably haven’t tried is buying a whole mutual fund. Sure, they’re great investment vehicles, but the complex and expensive nature of most mutual funds makes them a usually poor tool for teaching — especially for younger minds.
But the Monetta Young Investor Fund (MUTF:MYIFX), under the watch of manager Robert Bacarella, bridges the financial education gap with kids and parents alike.
While producing market-beating returns.
While also earning more than $10,000 in tax-free college tuition on the side.
That’s one tall order, not to mention a tough juggling act. But over about five years, MYIFX has been up to the task, meriting a closer look. So one by one, let’s take a gander at all the plates MYIFX has in the air:
The Monetta Young Investor Fund is a no-load, hybrid mutual fund that shares the large-cap growth category with players like Fidelity Large Cap Growth (MUTF:FSLGX) and Vanguard Growth Index (MUTF:VIGRX).
The “hybrid” refers to MYIFX’s mix of exchange-traded funds and stocks. Half of the fund’s $22 million in assets are made up of ETFs that track the S&P 500 or other groups of large-cap stocks, while the other half includes individual equities. And while MYIFX’s returns have generally beaten the category average and the S&P 500 (see table), the mind-set behind most of the holdings is primarily defensive.
|S&P 500 TR||+5.49%||-37.00%||+26.46%||+15.06%||+2.11%||+9.00%|
|% Rank in Category||87||1||8||5||17||87|
|Source: Morningstar *As of 2/29/12|
Bacarella openly admits the holdings in index- and large-cap ETFs are simply designed to control risk and keep pace.
“It keeps us in play,” he says. “And by ‘in play,’ I mean, we’ll track the index — the index, which 90% of managers have not been able to meet for any 10-year period since we’ve been keeping track of that information. All I’m admitting is I want to stay in the game. I want to put my men on base.”
To stick with the analogy, then, the remaining 50% of the holdings should be used to run up the score. But those individual holdings are awfully defensive, too.
The “other 50%” actually is a split of 40% core holdings and 10% short-term investments. Those core holdings include a number of steady-Eddie businesses that even a child can understand, such as McDonald’s (NYSE:MCD), Ford (NYSE:F) and John Deere (NYSE:DE). Although, they also include growth techs like Google (NASDAQ:GOOG) and — who else? — Apple (NASDAQ:AAPL). None of the holdings are weighted more than 3%, and Bacarella caps all potential weights at 5% — even Apple.
“The thing about Apple is, its growth is off the charts. But we don’t want to become so dependent, because there will be a day … where Apple will come down because of some announcement they make. I don’t want the fund that dependent on one name.”
Investors are placing their bets on the remaining 10%, where Young Investor attempts to hit its home runs by making short-term investments focused on either high potential growth or value. For instance, MYIFX had Intuitive Surgical (NASDAQ:ISRG) on the books last September, but exited in January, reaping a 26% gain.
The Young Investor Fund has achieved one-year, three-year and five-year annualized returns of 7.6%, 34.4% and 9.72%, respectively, earning it Morningstar’s five-star rating. The performance comes at a 1% expense ratio, which is less than the category average 1.32%. The ratio is capped until December 31, 2013, but Bacarella says investors worried about a hike after that shouldn’t.
“If we were to not have that cap today, the equivalent would be 1.14%,” he says, noting additional cap extensions can’t be considered until a year before the current cap expires. “We are making the assumption that assets will grow to a point where that expense ratio will be less than 1%. Our goal is to get the expense ratio to 0.85%.”