Stupid Investment of the Week
Dr.UdoBroemme : Stupid Investment of the Week
Commentary: Giftrust offers lagging returns, long lockups
By Chuck Jaffe, CBS MarketWatch.com
BOSTON (CBS.MW) -- In most bad investments, you find stupidity at various levels.
It may start with the concept, spread to the management, infect performance and afflict the customer who doesn't recognize that they're a lousy match for the product.
Sometimes, an investment starts out looking savvy at all of these levels and only delves into the dumb over time.
That's precisely the case with today's pick for Stupid Investment of the Week, American Century Giftrust.
Stupid Investment of the Week seeks to highlight the problems that make an investment far-from-ideal for the average consumer. The award hopes to arm consumers with the knowledge of what makes for a poor investment, so that investors can then root out other problem investments either already in theirportfolio or being considered for future purchase.
While obviously not intended as a buy recommendation, SIOTW is not an automatic sell signal. In this week's case, most investors can't sell Giftrust even if they currently want to, which is part of the problem. What's more, in bestowing the "award," there are times -- as with Giftrust -- when some investors may have a positive experience with the investment being honored, so it's key to remember that stupidity is measured in many subjective ways.
Giftrust (TWGTX: news, chart) is one of the more unique mutual funds in existence. It started in 1983, essentially as a way for company founder James Stowers to give gifts to friends and relations. The rules of the fund at the time:
1.You could only open an account as a gift for someone else, never for yourself;
2.2) The money had to remain in place for a minimum of 10 years;
3.3) The fund was going to be managed for aggressive growth in small- and mid-cap stocks, promising a bumpy ride that would be worthwhile once the lock-in period expired.
For years, the strategy worked. The fund grew to well over $1 billion in assets and investors loved the concept. Families would get together to make gifts with, say, parents and grandparents contributing to the same child's account.
Everyone assumed the market would overcome its down years during any 10-year stretch. And investors ignored the idea that American Century was locking in its management fee on the fund for a decade, regardless of how Giftrust performed; the company was virtually guaranteed a steady cash flow on the fund.
If you invested in Giftrust during its first five years of existence -- Giftrust opened in 1983 -- your average annual return was likely to be more than 20 percent per year when the lock came off the gift box after 10 years and your recipient had the opportunity to withdraw the money.
A lot of investors, at that point, were wondering why they couldn't open an account for themselves, rather than staying in the gift mode.
But over the last decade, with the exception of 1999, the fund has mostly been a laggard.
As a result, investors are finding themselves lashed to the mast of a ship that's listing dangerously.
a newborn only to find their money shrinking during six of the last seven years aren't thrilled to find out that the trust is air-tight and there is no moving the money until the lock-in period is over.
Had those gift-givers picked any traditional mutual fund to use as a gifting vehicle, they could have changed funds at any time and for any reason.
Over the last five years, Giftrust is off an average of 9.4 percent per year, roughly one-third more than the Standard & Poor's 500. Investors whose 10-year lock-in is just ending have earned a 3. 4 percent annualized return, or less than they would have gotten by investing in a 10-year certificate of deposit a decade ago.
American Century changed the management team last year, although that is not entirely confidence-inspiring. After all, part of the original premise was that this fund would give good managers a long time to work their magic, without the pressure of regular redemptions to potentially alter the day-to-day strategy.
Bad performance alone is not enough to make an investment stupid, however.
What truly earns the distinction occurred last year, when American Century extended the Giftrust lock-in period to 18 years and eliminated the provision for several relatives to contribute to the same account, as well as the opportunity to make repeated gifts over time.
While old Giftrust investors were grandfathered, new holders are making a one-time contribution into a below-average fund where no one can extract the money for nearly two decades.
American Century, to its credit, acknowledges that Giftrust not right for everyone. The fund was created before the advent of the 529 college savings plan, it was never developed to educate children on how to invest in the vein of a SteinRoe Young Investor (SRYIX: news, chart) and the key selling point was the wrapper -- the trust exterior and the rules, rather than the fund itself.
In today's more modern era, the gift fund has become a bit of an anachronism.
Still, Giftrust currently has roughly $715 million in assets; while accounts are maturing and some investors have been exiting, company spokesman Chris Doyle noted that Giftrust is on a pace to open about 300 new accounts this year despite the heightened restrictions.
"We're the first to acknowledge this is a very unique fund," says Doyle. "Read the prospectus and it pretty much asks you 'Are you sure you want to get into this? Because you had better be really, really, REALLY sure because there's no turning back."
When an investment's big selling point is its structure, and when its rules guarantee that management locks in its fees and profits no matter performance over a long period of time, and when investors are left with no flexibility, it has developed stupidity on enough levels that it should be avoided.
Chuck Jaffe is a senior columnist covering personal finance for CBS MarketWatch. His work appears in dozens of newspapers throughout the United States.
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