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WALL STREET, CALIFORNIA | MANAGERS FORUM

Fund With Dick and Jane

It May Be for Kids, but It's Guided by Principles Anyone Can Use

September 02, 1997

SteinRoe Young Investor is helping to make a lot of kids richer.

This unusual mutual fund, which targets underage shareholders, has risen 135% over the last three years. It focuses on blue-chip companies that are recognizable to children--stocks like Mattel, Microsoft and McDonald's. In particular, portfolio managers Erik Gustafson and David Brady have been going to school on the global-consumerism theme.

The fund pursues the dual objective of trying to make investing educational as well as profitable. It does this with prospectuses, shareholder reports and other materials that even a kid could read.

In addition, Gustafson and Brady encourage shareholders to write letters expressing their ideas on making money. Many adults also seem to view the fund as a good way to learn about investing--they represent one-quarter of all shareholders.

A $100 initial minimum makes it easy to get started for people who agree to sock away at least $50 a month until their accounts hit $1,000. Otherwise, a $2,500 minimum applies.

Gustafson, a 34-year-old former securities attorney, has guided the fund since its inception in April 1994. Brady, 33, joined one year later. They also manage the SteinRoe Growth Stock Fund, which has earned a three-star rating from researcher Morningstar Inc. The two talked to Russ Wiles, a mutual fund columnist for The Times.

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Times: This fund has a different appeal with its focus on kids as investors. How do you screen companies to meet this theme?

Gustafson: At least 65% of the fund's assets have to be invested in companies that are familiar to or relate to young people. You might think that this limits our financial horizons. In fact, it does not. Companies that [affect] the lives of young people are many and varied. They range from Mattel and Wrigley to Motorola, the largest holding in the fund and a firm that directly [affects] the lives of young people through its wireless communications products.

Brady: We invest in high-quality growth stocks. We keep about 60% of the portfolio in large stocks, 20% in mid-caps and 20% in small stocks. The idea is to have the large stocks provide steady growth, with the medium and smaller companies contributing upside potential.

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Times: So why pursue kids and teens as shareholders?

Brady: Our parent company, Liberty Financial, conducted a study years ago on junior high school students' interest in and understanding of money and investing. It found that kids were highly interested but had a low level of understanding. The topic wasn't being taught in classrooms. A lot of parents didn't have a good grasp of the subject, either. So we felt there was a need for a fund that provided education for shareholders, along with a better rate of return than that paid by traditional kid investments like U.S. [Savings] Bonds.

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Times: I assume there's some leeway in deciding which companies affect the lives of youngsters. Brady: When we started the fund, we were concerned that we would be limited by our objective of holding stocks that kids could understand and relate to. But in Dollar Digest, our quarterly newsletter to shareholders, we encourage them to write in with their ideas for making money. These range from how to build a better lemonade stand to which stocks they would like to see in the fund. We have received blanket recommendations from 13-year-olds that we should own more technology stocks. They don't just cite Wrigley, McDonald's and other obvious choices. It's through these letters that we have come to realize our investment universe is broad.

Gustafson: Our screening process focuses on companies that are familiar to young people, but we also have a mandate to make money for shareholders. We aren't going to sacrifice that ultimate objective just to pepper the fund with companies that are immediately familiar to everybody as being relevant to young people.

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Times: Have you ever bought a stock based on a tip from a young shareholder?

Brady: No, but we've spent a lot of time researching stocks that they have written about.

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Times: What percentage of your shareholders are minors?

Gustafson: About 75% of the accounts are [custodial] accounts for minors. We have over 100,000 shareholders.

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Times: Does that mean the other 25% is held by adults?

Gustafson: Yes. We've found that many adults need to learn about financial services and the financial markets too. We have discovered a great acceptance among some not-so-young investors.

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Times: So given your investor base, is this a fun fund to manage?

Gustafson: Absolutely. Dave and I also work on the SteinRoe Growth Stock Fund, a portfolio that focuses only on large, high-quality growth companies. Young Investor gives us a wider horizon. It allows us to expand into smaller companies.

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Times: This is a team-managed fund. How do you two interact?

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