A reader asks: "What do you think about the Monetta Young Investor Fund (MYIFX) as an investment option for kids and young adults?"
This fund was new to me, so I popped over to Morningstar to look it up. Here's what I found, along with some thoughts:
The fund started at the end of 2006. It's good for a fund to have a manager who has been with it for a long time, and the Monetta fund's Robert Bacarella has indeed been with it for all its life -- but by itself, that's not enough to make a decision.
It has no load fee, which is good. Why fork over 5% or more, as many people do, just to invest in a fund, when there are lots of load-free alternatives?
The dividend yield is 0.57%, which is rather insignificant. Don't look to this fund for income -- although if you're investing for a child, you should be after capital appreciation more than income.
The fund's expense ratio of 0.94% is within a category-average range, and its minimum investment of $1,000 is manageable for many young people, with the help of others -- although it might be better set lower, to attract more kids. (Aha -- if you sign up for automatic deposits of $25 or more a month, the minimum initial investment drops to $250.)
How has the fund done so far? Well, not spectacularly. In 2007, it failed to meet the S&P 500's return, by a small margin, gaining 5.2%. In 2008, its return is again not far from the S&P 500 -- which means it was down nearly 10% when I checked. To be fair, this is way too short a time to evaluate its performance. For all we know, it may have gobbled up pieces of strong, undervalued companies that will recover and surge in coming years.
The S&P 500 explanation
The similarity to the S&P 500 isn't purely coincidental. As is explained at the fund's website, it invests about half its assets in companies that children and teens would recognize, including Walt Disney (NYSE: DIS ) , Google (Nasdaq: GOOG ) , McDonald's (NYSE: MCD ) , Kohl's (NYSE: KSS ) , and Coca-Cola (NYSE: KO ) . The other half goes into index funds or exchange-traded funds (ETFs) that track the S&P 500.
The reasoning behind the S&P 500 element is interesting. The fund's website explains that historically, broad-market index funds have beaten about 75% of all actively managed equity funds, mostly because management fees and trading costs lower results. (All true.) Therefore, the fund decreases its trading costs by leaving half its assets in indexed investments, and it also lets those assets earn the market's average return. With the other half of the assets, the managers set out to beat the index.
Of course, you can invest in an S&P 500 index fund for a fraction of the cost of this fund -- so it's not quite the expense-ratio bargain it may appear to be. And I'd think that if the managers aimed to beat the market with half the fund's assets, they might consider doing so with all the assets. Still, their caution might serve investors well -- especially if their funds underperform the S&P 500.
The bottom line
So what do I think about this fund? I'm of two minds.
On the one hand, I applaud it. It can get kids interested in investing via its quarterly newsletters mailed to shareholders and by investing in companies kids know and like.
But, kids might do as well or better simply by investing in an S&P 500 index fund. The index includes all the stocks mentioned above, plus plenty more that kids have heard of. The fees are certainly lower.
If you want to aim for returns greater than the market average, there are other funds that have strong records and promising prospects. You might combine an index fund investment with a carefully chosen fund.
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