MarketWatch columnist Chuck Jaffe suggests you keep the youth-oriented mutual fund called The Kids Fund off your shopping list, even though it's a good idea.
If insanity is doing the same thing again and again and expecting different results, then you’d have to really be crazy to believe that you can try the same thing, do it worse than the original and somehow manufacture a happy ending.
And yet, that is precisely what is happening with the Kids Fund, a new mutual fund out just in time for the holidays, designed to be a tool that helps parents raise “great kids” who come out of the experience not only with investment profits but with an education to boot.
It’s a terrific idea, but one that has failed before despite being backed by experienced fund managers, rather than small unknown firms. With that in mind, the Kids Fund should not make your holiday shopping list because it’s a Stupid Investment of the Week.
Stupid Investment of the Week highlights the concerns and conditions that make a security less than ideal for average investors, in the hope that showcasing one bad issue will make it easier for consumers to avoid danger elsewhere. While obviously not a purchase recommendation, neither is this column intended to be an automatic sell signal.
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At its best, the Kids Fund (KIDSX), is a terrific idea, but in execution it may have been doomed from before its launch late last month.
According to a news release at the time of its opening, the Kids Fund is “designed to be a tool for parents seeking to educate their children on the virtues of investing by allowing them to ‘take ownership’ in companies that they already know and love — many of which provide products affecting their daily lives.”
Will Hepburn, the fund’s manager and president of its sponsor, Hepburn Capital Management in Prescott, Ariz., said at the time that his firm was thrilled to “introduce the first mutual fund catering specifically to children and the companies that cater to their demographic,” noting that youth savings now accounts for more than $100 billion, and is dominated by savings bonds, rather than stock investments.
Everything there has merit, except for the idea that Kids Fund is the first to try this. In fact, other funds aimed at kids have been tagged Stupid Investment of the Week before. There was the Monetta Young Investor fund (MYIFX) in early 2007 and the now-defunct Columbia Young Investor fund in 2005. Both promised virtually the same things, providing educational investment materials, stocks that young shareholders would recognize and identify with, and the promise of superior returns. And while USAA First Start Growth (UFSGX) has never been featured in this column, it has tried the same fund-as-educational-tool approach to rank in the bottom 10 percent of the large-cap growth category over the last decade.
(Another fund aimed at being given as a gift — American Century Giftrust (TWGTX) — lacks the educational component of the Monetta and USAA and Kids genres, but has twice been featured in this column.) Those other funds had the same basic pluses as Kids Fund, specifically a great Web site. While thekidsfund.com is a good tool for parents and teachers, it’s not nearly as developed as Monetta’s younginvestorfund.com.
Like Kids Fund, they were less about age than investing experience. Once someone moves past the “novice” stage, there’s a real concern as to whether any “young investor fund” would continue to serve them well.
Still, that’s a problem for some other day, namely one where the young investor has had enough success to want to move to the next phase in their investment life.
The industry’s first cracks at funds for children all had or have dramatically lower costs than the Kids Fund, which is carrying a 2.05 percent expense ratio that actually has a waiver that brings it down to 1.95 percent, according to the fund’s prospectus. By comparison, the Monetta fund charges a flat 1 percent, USAA First Start is at 1.38, a hair below the average equity fund’s cost level.
Columbia Young Investor fund (which started its life as SteinRoe Young Investor) had some success early on, grew large and had expenses that were less than half of what Kids Fund is charging.
Further, Hepburn’s management style is as an active trader; the fund’s documents suggest that turnover will run as high as 150 percent. That adds trading costs to the mix — they’re not part of the expense ratio — and raises some question about what kinds of lessons the children/shareholders get about long-term investing.
And then there’s the front-end load, a massive 5.75 percent for anyone who buys the fund directly and without the help of a fee-only adviser working with the management company.
“At that level of costs,” says Russel Kinnel, director of fund research for Morningstar, Kids fund “teaches children that their parents aren’t very good fund investors and that they had better figure this stuff out on their own pretty quick.”
Hepburn could not be reached for comment on how he intends to overcome the high costs.
David Brady of Brady Investment Counsel in Chicago — who managed the Stein Roe Young Investor fund during its heyday — says that fund’s concept is solid and “should definitely not be written off as a gimmick,” but said that Kids Fund will have a tough time overcoming the costs.
“Educating kids is a great idea, so great that it sells itself,” Brady says. “The idea was a good one then [in the 1990s when Stein Roe introduced the first kids-oriented fund] and is just as relevant to today. However, given the high cost of investing in and maintaining this fund, it is tough to see how a parent would not be better off buying an index fund, paying attention to the annual reports and then taking a few trips to the Internet or public library to educate themselves and their kids on money and investing.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at email@example.com or Box 70, Cohasset, MA 02025-0070.