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| | Mutual Funds
A fund even a child can understand
Fidelity Select Leisure focuses on companies that do things children like, such as hamburgers and amusement parks. It also does a fine job of outperforming the market.
By Timothy Middleton
Would you like to get paid for your free time?
You can, sort of. You can invest in free time: Time spent traveling, watching TV or even surfing the Internet.
A child can understand this. You can also invest in a mutual fund that invests in a way your child can understand. Then, you can use the investment as a classroom on investing for your kid.
Just dont tell her that's what you're doing.
The fund is Fidelity Select Leisure (FDLSX). It owns Walt Disney (DIS, news, msgs), McDonalds (MCD, news, msgs), Yahoo! (YHOO, news, msgs) and a host of other names all Americans know, even young ones.
And heres the best part: It makes money -- lots of it. In the 15 years ended June 30, it delivered annualized returns of 12.2%, nearly a full percentage point more than the market and more than 97% of all other funds.
The only fund that specifically targets kids is Columbia Young Investors Fund (LYIAX), a school for scandal, literally, and a poor performer. Unless you want your kids to learn about what Morningstar characterizes as secret market-timing deals, look instead at Fidelity Select Leisure.
Easy livin'
And this summertime, when the livin is at least relatively easy, is a good time to look at it. Like the rest of the market, the fund has paused this year, advancing only 1.3% as of July 13. But its still up 14.9% from a year ago, ranking it among the best in the marketplace.
| Top holdings | | Stock | Industry | | Yahoo! (YHOO, news, msgs) | Internet Information Provider | | News Corp. (NWS, news, msgs) | International media and entertainment | | McDonald's (MCD, news, msgs) | Restaurants | | Viacom (VIA.B, news, msgs) | Entertainment -- cable networks,
television, radio, outdoor, and video | | Univision (UVN, news, msgs) | Broadcasting -- TV | | Carnival (CCL, news, msgs) | Entertainment -- global cruise and vacation operator | | Clear Channel (CCU, news, msgs) | Broadcasting - Radio | | DirecTV (DTV, news, msgs) | Entertainment, information and communication services | | Cendant (CD, news, msgs) | Travel and real estate services | | Liberty Media (L, news, msgs) | International cable television distribution,
telephony and programming |
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Note: As of June 30, 2004. Source: Fund
The fund has done that well through a combination of circumstance and shrewd stock picking. The industries it targets, such as broadcasting, media, travel and some Internet content, are small, accounting for less than 5% of the S&P 1500 Super Composite Index, so the fund typically owns only about 65 names.
That makes it inherently concentrated, and the funds managers -- there have been six in the last five years, counting the latest, Aaron Cooper -- havent feared to make heavy bets on individual names: The top 10 positions in the portfolio account for 42% of assets, which are a modest $203.5 million.
Such a concentrated portfolio is also likely to be more volatile than the market, and Fidelity Select Leisure certainly is. In the March-through-May period last year, amid a general market rally after the U.S. invasion of Iraq, the fund shot up 20.8%, compared with the 15% rise of Vanguard 500 Index (VFINX). In August 2001 through October 2001, the period of the Sept. 11 terrorist attacks, it tumbled 19.4%, to the markets 12.2% decline.
Fighting off the bear
But since the general bias of stock prices is upwards, high volatility often works to investors advantage. That has been true of this fund. It even did well in the bear market, when consumer spending was the only type that didnt dry up.
| Fund performance | | 1 year | 3 years | 5 years | 10 years | 15 years | | Net return (1) | 23.0 | 2.5 | 0.1 | 13.6 | 12.2 | | Return above S&P 500 (2) | 3.9 | 3.2 | 2.3 | 1.8 | 0.9 | | % rank in category (3) | 8 | 3 | 10 | 4 | 14 |
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Notes: 1-Annualized. 2-In percentage points. 3-Large-cap growth. As of 6/30/04. Source: Morningstar Inc.
Volatile funds appeal to speculators seeking quick profits, but they also appeal to long-term investors, who ignore the extremes of one-quarter or one-year performance in favor of longer periods.
For young investors, this is a crucial lesson to learn. The most common mistake investors make is to lose heart when their funds are down, for whatever reason, and thus to chronically sell low and buy high. Patience doesnt come naturally to a poor investor, any more than it does to a child. What makes investors (and parents) good is that they have learned it.
Among funds specifically targeted at young people, the best known is what used to be called Stein Roe Young Investors, and is now Columbia Young Investors. As the name change suggests, the fund was gobbled up by a financial warehouse, which in turn merged with Nations Funds, one of the worst offenders in the fund scandals over improper trading.
At the center
Columbia Young Investors was at the center of the fund-industry scandal. Morningstar analyst David Kathman noted in a recent commentary: At least three clients (of this fund) made special market-timing deals that were approved by the funds manager at the time, and one client bought and sold the fund an astonishing 200 times just in a single year, 2000.
Market timing, or rapid trading, skims profits from long-term shareholders by sluicing off a portion of sharp gains and raising fund expenses.
A Columbia spokesman notes the offending manager has left the company, and that the firm has agreed to make restitution to shareholders.
In addition, the Columbia fund did far worse than the market in from 2000 through the end of 2002 and trails the Fidelity portfolio over the last 10 years by more than three percentage points annually.
Fidelity, on the other hand, emerged from the scandals unscathed, and indeed pioneered some practices that have since served as models for reform, such as fair-value pricing, which drastically reduces pricing disparities due to trading in varying time zones.
Unfortunately, this fund teaches dubious lessons as well as helpful ones. Fidelity uses its Select portfolios as a training ground for securities analysts on the track to becoming well-rounded portfolio managers; hence the heavy turnover at this fund.
No comment
Fidelity also declines to make new managers available for interviews, so getting timely information about the fund is all but impossible. The most recent shareholder report published by the fund, for the period ended Feb. 29, was penned by a now-former manager. Cooper was named to his post only last month; prior to that he was an analyst of broadcasting stocks.
By the same token, Fidelity doesnt suffer poor performance from its fledglings, and in general Select funds do a good job of delivering on their sectors or themes. (Eight of the 22 highest-performing funds over the last 15 years have been Select portfolios, according to Morningstar.) This fund has delivered dazzling performance in periods when managers were shifted around, including last years 41.9% gain despite two changes at the helm.
Taking all that in, I can think of no better fund for a young investor to identify with and prosper from. J.P. Morgan once lectured a young new employee that the five cents he was spending for lunch could, invested at interest, become the core of a comfortable retirement income.
Shareholders of this fund can take pleasure in knowing that some of the money they spend at McDonalds or Disney World will return to them, and that reinvested dividends will compound for yet further gains. Compounding is the sweetest lesson new investors learn.
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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