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Dude, where's my fund?
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March 26, 2001: 10:37 a.m. ET
Industry tailors new mutual funds to attract teen investors
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Chris Stallman was a high school freshman in a town near Chicago when he started playing the market. He wanted to save money for college, so he invested some cash in Stein Roe Young Investors Fund.
He learned about things like price-earnings ratios and capital gains, and built an investing Web site for teens while maintaining a 4.0 grade point average.
Today, still a year away from college, he's got enough saved – along with scholarships -- to pay all of his tuition bills.
 "I think long-term investing is the way to go," said Stallman, 17, who has his eye on University of Michigan, University of Illinois, and University of Southern California.
Teen-agers just might be the perfect investors for a fund industry that some say has peaked.
The $7 trillion industry experienced stellar growth during the bull market of the 1990s as baby boomers socked away money for retirement. But as more investors started managing their own portfolios and choosing stocks and alternative products like exchange-traded funds, the mutual fund business has been more on the defensive, searching for ways to reinvent itself.
What could be better than a kid who hasn't developed bad spending habits, has no debt and about 70 years to invest?
 Stein Roe Young Investors Fund, with $1.2 billion in assets, was among the first funds designed for kids to hit Wall Street. Since then, there's USAA First Start Growth, Monetta Express Kids Program, and Royce Trust and Giftshares Fund, among others.
"It makes sense," said David Brady, manager of the Stein Roe fund. "The shareholders are young. You're educating them on money and investing. If you do a good job, chances are you're developing a relationship for life."
Stallman, whose site, TeenAnalyst.com, aims to educate teens about investing, agrees it's a market that could take off. A few fund companies – he declined to name them –already have spoken with him and others from the Web site to gauge interest in new funds for teens.
"I wouldn't be surprised to see fund families like Fidelity and T. Rowe Price get into the teen investing market," Stallman said.
Teach your children well
Of course, by law, kids can't invest on their own. They have to use a custodial account and need a parent or guardian's permission.
 "The law is to make sure parents are involved in the decision," Brady said.
Stein Roe sends investors a quarterly educational newsletter, Dollar Digest, where Brady explains his investing philosophy. He also has a 3 p.m. ET chat session every other week on America Online. (AOL Time Warner is the parent of CNNfn.com).
 "The kids who ask questions are very knowledgeable," Brady said. "I receive all kinds of e-mails and letters with all kinds of investments."
Curt Rohrman, manager of USAA First Start Growth Fund, looks at the product as part of a three-legged stool. One component is the newsletter Ask Curt, another is an ATM card tied to a savings account to encourage good savings habits, and the third is the fund.
In Ask Curt, Rohrman highlights a stock in the fund every month and encourages parents to talk with their kids about it. The newsletter also has a mail-in card allowing investors and their parents to ask questions and make comments. Rohrman gets about 250 cards a month – way more response than any other fund me manages.
"We respond to every single card," Rohrman said.
What teens like in a fund
Rohrman said teens don't seem as uptight about recent market losses as older investors.
"Kids today are more savvy," Rohrman said. "They are very aware of what money is all about."
Click here to check your mutual funds on CNNfn.com.
Some teens seem almost like socially-responsible investors, Brady said. For example, one teen wrote him that he liked the Gap (GPS: Research, Estimates) because he not only thinks the clothes are "cool," but the company supported an AIDS Foundation.
 "They're interested in growth and cool ideas," Brady said. They definitely want to see their stocks moving...but if the company is giving something back, that would be ideal."
Stallman, who now invests most of his money in stocks, said a lot of teens wait until they hit 20 before looking at Wall Street.
"They say, 'I'll put it off till I'm 20,' but the real money you make is when you start saving really young," Stallman said.
Brady thinks teens could be even more aggressive, given their long-term horizon.
Where the funds are investing
The USAA fund has $180 million in assets and is down 23 percent year to date as of March 21.
The fund invests about 35 to 40 percent of the portfolio in "consumer" stocks that are recognizable to kids, and the rest in more aggressive technology and health-care companies, Rohrman said.
The consumer names like Mattel (MAT: Research, Estimates) and Toys "R" Us (TOY: Research, Estimates) balance out the riskier tech and health-care stocks like Intel (INTC: Research, Estimates), Microsoft (MSFT: Research, Estimates), and Palm (PALM: Research, Estimates).
"Kids know about Intel, Microsoft and Palm," Rohrman said. "If you're saving for college...any investment adviser will tell you to be more aggressive."
The Stein Roe fund also invests in predictable stocks like McDonald's and Disney, but Brady also likes Cisco Systems (CSCO: Research, Estimates). The fund is down about 13.65 percent year to date as of March 23, according to Morningstar.
Cisco has been stung by the economic slowdown and earlier this month said it will cut up to 8,000 jobs, but the long-term the picture is brighter, Brady said. The company is the "traffic cop" of the Internet and is helping to build the future of the Web.
Brady's favorite long-term stocks are Calpine (CPN: Research, Estimates), an independent producer of low-cost energy. The primary fuel is natural gas, which is one of the cleanest and friendliest to the environment, he said.
Brady also likes Hispanic Broadcasting (HSB: Research, Estimates), the leading Spanish language radio broadcaster. The Hispanic population has doubled in recent years and will continue to grow, Brady said.
Stallman: A long-term horizon
For Stallman, a junior in high school, he's hoping his good grades will allow him to get a full scholarship, so he can leave his college savings untouched for retirement. He'd like to study business or finance.
Stallman got his interest in finance from his mother, who worked in a bank. She taught him how to count money when he was four or five, he said. He founded TeenAnalyst.com with one friend and runs it with another friend.
The site includes articles by Stallman on the dangers of credit and how traders buy and sell stocks. It also has the Young30 Stock Index,
consisting of 30 stocks that affect young people.
The Young30 names include Texas Instruments (TXN: Research, Estimates), Merck (MRK: Research, Estimates), Advanced Micro Devices (AMD: Research, Estimates), and Blockbuster Inc. (BBI: Research, Estimates).
"It's run as a business and generates a profit," Stallman said. "We don't pay ourselves. We want the business to grow." 
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