Why We're Not Endorsing This Kid-Themed Fund
Editor's note: See the companion story about howBob Bacarella promotes his fund.
Creating a mutual fund for young investors is a noble endeavor, but the concept seems to work better than the reality. For example, after acquiring the Stein Roe funds, Columbia merged Stein Roe Young Investor into another fund, effectively eliminating it. Two other such funds, USAA First Start Growth (symbol UFSGX) and SunAmerica Blue Chip Growth (SVLAX), have produced less-than-stellar returns.
And then there’s Monetta Young Investor Fund (MYIFX). The fund’s history is brief but promising. From its launch in December 2006 through October 20, the fund returned 3.1% annualized. Over that period, Standard & Poor’s 500-stock index lost 6.6% a year. The fund lost 27% last year, beating the S&P 500 by ten percentage points, and its 42.3% surge so far this year trounces the index by 19 points.
Although Young Investor hasn’t been around for a long time, its manager, Bob Bacarella, has been investing professionally for more than 30 years. Bacarella graced the cover of Kiplinger’s Personal Finance in March 1992. Back then, we dubbed his flagship Monetta Fund (MONTX) “a big-league performer” for having returned an annualized 20% over the previous five years.
At the time, Bacarella followed strict rules about when to sell stocks, unloading those that fell 20% or rose 30%. But not long after we praised him, his system stopped working. In October 1996, we called the Monetta Fund a “stinky fish.”
Starting in 1999, though, Bacarella seemed to have regained his touch. Over the past ten years, Monetta Fund, which holds just $46 million in assets, returned an annualized 3.0%. That may not seem like much, but it tops the S&P by 2.9 percentage points a year. Year-to-date, the fund -- named for the Latin word for money, moneta -- is up a whopping 46.8%.
Bacarella, whose voice bears a passing resemblance to that of radio DJ Casey Kasem, says he’s become a smarter investor over the years. To find winners, he watches the trading volume of a stock that’s on the rise to determine when investor interest is picking up. He also keeps a close eye on what others in his category are holding. Looking back, he says the requirement to sell after a stock gained 30% hurt his performance. So he’s joined the momentum bandwagon, holding a stock until it starts to fall behind its peer group.
Bacarella doesn’t analyze companies himself. He reads analyst reports but doesn’t pay attention to earnings estimates. Instead, he looks for words such as “beating” and “improving.” “The game is buying stocks other people want to own,” says Bacarella. “The true test is volume, which determines the extent of interest."
For now, he’s bullish on Google (GOOG), a top holding in both Monetta Fund and Young Investor. “Here’s a company you want to hold for the next five years because of its dominant position,” he says. He has a similarly upbeat view on Apple (AAPL), a top holding in Young Investor.
Young Investor is not a pure play on kid-related stocks. Although the fund holds about half of its assets in companies kids know -- for example, Walt Disney (DIS) and McDonald’s (MCD) -- the other half are in exchanged-traded funds designed to track the stocks of large U.S. companies. Bacarella says he likes ETFs because of their low cost and low turnover. Besides, he adds, most active managers are “closet indexers” anyway.
On the plus side, Young Investor lets you start for just $100 if you agree to an automatic-purchase plan and offers an age-based financial “kit” of piggy banks for tots and baseball caps for teens. Its annual expense ratio of 1.04% is well below the 1.31% for diversified U.S. stock funds. (The figure for Young Investor includes the fees of its ETF holdings.)
The fund’s most appealing feature may be its tuition-reward program. Students enrolled in the program can receive credits for up to one year’s worth of tuition at more than 235 U.S. colleges and universities, most of them small (you can see the list of participating schools at www.tuitionrewards.com/index.cfm?meat=schools). Four of the schools -- Beloit College, Creighton University, Clark University and Hillsdale College -- are on Kiplinger’s Personal Finance’s list of the 100 best values in private colleges and universities.
The tuition deal aside, we’re not completely sold on Bacarella or Young Investor. Bacarella essentially practices technical analysis, which judges securities on the basis of price and volume trends. We’d prefer to invest with a manager who thoroughly vets companies. That, plus Bacarella’s extracurricular activities promoting his fund on the Internet (see below), gives us pause.