Would you purchase shares in a mutual fund that sends you a yo-yo?
The folks who run the Stein Roe Young Investor Fund are betting you will--and so far, they're right. Although this fund, as its name implies, targets young investors, it's a good vehicle for investors of any age who are comfortable with an aggressive investment strategy. That approach has paid off in rapid growth of shareholders and assets: Since the beginning of 1996, the fund's net assets have grown from less than $42 million to $257 million.
About that yo-yo: Stein Roe views it as more than a marketing gimmick. One of the fund's goals is to broaden the pool of mutual-fund investors, particularly among children. To that end, the fund gives shareholders information many fund companies don't provide. The Stein Roe Young Investor Fund Owner's Manual explains what a mutual fund is, the merits of diversification, and the rewards of regular investing--all in terms children (and adults) can understand. Kids will find this no-load fund's minimum purchase of $2,500 a bit steep, but to encourage regular saving, Stein Roe also offers an automatic investment plan that requires only $100 to get started.
The Young Investor Fund boasts a total return of nearly 37 percent over the past 12 months, which ranks it second among the 177 large-growth offerings Morningstar tracks. (Large-growth funds invest primarily in the stocks of big companies that are expected to continue posting strong earnings increases.) Since its May 1994 inception, the Young Investor Fund has outpaced the surging S&P 500 by more than 25 percentage points; only 22 equity funds in Morningstar's database exceeded the fund's total return during that time.
The Young Investor Fund employs an aggressive investment strategy to obtain these breathtaking returns. The types of fast-growing companies the fund typically buys (for example, Cisco Systems) are very pricey. Its price-earnings ratio is above the average for large-growth funds. (A company's P/E ratio is simply its stock price divided by earnings per share during the past 12 months.) In a market fluctuation, this aggressive stance could hammer the fund's returns harder than those of its peers because high P/E stocks are usually hit hardest when a company reports unexpectedly low earnings or the market declines.
The fund's charter dictates that 65 percent of fund assets be invested in companies that affect the lives of children, although in practice, management can also invest in companies that indirectly affect the lives of children, such as a car rental company (since children will ride in the cars). That flexibility is a plus because it allows management to invest in what it believes are the best, most attractively valued firms--not just those that directly affect children.
The Young Investor Fund isn't old enough to earn a Morningstar risk score, which is awarded after three years, but its high P/E ratio certainly increases investor risk. Therefore, this fund is most appropriate for those who are willing to weather the short-term ups and downs its aggressive management may cause. In fact, this fund might more accurately be named the Stein Roe Long-Term Investors Fund. That's not quite as catchy, though, and it would make it awfully difficult to justify that yo-yo.
At A Glance
Fund name: Stein Roe Young Investor Fund
Managed by: Stein Roe & Farnham, Chicago
Total assets: $257 million
1995 return: 39.79%
1996 return: 36.96% (as of 11/30/96)
Expense ratio: 1.21%
Percentage invested in stocks: 87.6%
Percentage invested in cash: 11.2%
Phone: (800) 338-2550, (312) 368-7800
Scott Cooley is an associate analyst at Morningstar. The above opinions are those of the author and not of Entrepreneur. These investment vehicles may not be right for you. Carefully investigate before investing.