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%.”
A quick look at the Young Investor Fund’s website shows a swath of bright colors and large graphics clearly geared toward kids. But MYIFX offers more than just window dressing. Upon opening an account, children will receive age-based financial kits, including fun items like an eco-friendly piggy bank and a quarter-collecting album, to more-to-the-point materials like newsletters and money management software.
Bacarella himself has written an investment tutorial geared toward high school-age kids, and he’s even working on creating a financially educational video game.
“That’s what lacks in today’s environment in terms of teaching kids financial literacy. Most plans have failed at it. And that’s because it’s not fun.”
But perhaps one of the best educational tools is the incidental by-product of the fund’s defensive nature — the glut of consumer names. In addition to McDonald’s and Apple, MYIFX also holds PepsiCo (NYSE:PEP), Disney (NYSE:DIS) and MasterCard (NYSE:MA) — again, businesses that are relatively easy for kids to follow. And the fund’s gains and losses themselves can be used to teach children the merits and pitfalls of investing.
“It’s a fund kids can relate to, the parents can relate to. They know when the market goes up, half of the fund is going up.”
In addition to the actual gains of the fund, investment in MYIFX also provides investors with free enrollment in the SAGE Tuition Rewards program, which can generate up to $11,250 in tax-free tuition money.
The SAGE program uses a points-based system, with 1 point representing $1. Points accrue from a child’s first birthday through his or her 17th. It’s a simple program that Bacarella thinks trumps traditional tuition savings account like 529 plans.
“A lot of parents unfortunately don’t set up college saving plans because they’re confused. If they went into a 529 plan, which one should they go into? It frightens them rather than encourages them.”
When investors buy into MYIFX, their child receives a 500-point bonus, then earns varying point bonuses for every year of enrollment (and holding the fund) thereafter, awarded every birthday. In total, one child enrolled in SAGE from birth can accumulate up to $11,250, which can be used across a current group of 285 institutions — a number that’s growing by about a school every month, Bacarella said. However, while the list is vast, state schools (and their cheaper tuitions) are not eligible.
Past the expense ratio, MYIFX’s $100 entry fee (with $25 monthly payments, to a total of a $1,000 deposit) and no-load status translate into a very cheap way to get into a mutual fund. And while the fund is marketed to kids, it’s not managed to their tastes.
“What good is it to have something that’s geared to a particular group of people if it underperforms?” Bacarella says.
Potential investors should note that while the fund has strong past returns, its makeup isn’t built for galloping gains. Investors looking for more robust returns certainly have a number of more fitting avenues to choose from.
MYIFX is built to limit downside risk, though it has enjoyed a nice ride over the past five years. Still, it’s not invincible — with 50% of its holdings in those index and large-cap ETFs (and the majority of its singular holdings in the same boat), broader market downturns will take their toll.
Still, past returns seem to vouch for MYIFX, illustrating that it’s more than a gimmick. While Young Investor happens to be packaged with kid-friendly bells and whistles, this mutual fund is built to play.
Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.