Giftrust investors are happier now

INVESTING

January 16, 2000|By Bill Atkinson

INVESTORS IN THE American Century Giftrust know about pain and suffering.

They agonized in 1996 when the fund returned 5.78 percent while the broader market shot up 20 percent. They grumbled a year later when the Giftrust lost money, and the market rose still higher. They protested the next year when the fund fell more than 13 percent and the market soared.

Letters poured into the company, and some were "nasty," recalls Christopher Doyle, a spokesman for American Century Investments, a Kansas City-based mutual fund company.

The tone was: " `Gee, you guys turned your back on your shareholders,' " Doyle said.

But Giftrust's 300,000 shareholders are happier these days because the drought seems finally to be over. The fund rebounded last year, returning 87.26 percent -- its best performance ever.

"I have been a lot more encouraged over the last year, year and a half," says Scott Cooley, senior analyst at Morningstar Inc., a Chicago-based firm that rates mutual funds.

What makes Giftrust shareholders so emotional is that they are locked into the irrevocable trust for at least 10 years.

There is at least one other fund that is similar to Giftrust, experts say.

The Giftrust is a way for a parent or grandparent to set money aside for a child that can be used for college, to buy a house, a car or for any other purpose.

It is also a "forced investment program," Doyle says. "It protects you from your worst instincts, which is to sell in a falling market."

If American Century had buckled under the pressure and let investors out in 1998, they would have missed 1999's surge, Doyle says.

But if investors could have gotten out, they might have done better putting their money into index funds, or funds that invested in technology or large companies, all of which rose sharply in the years Giftrust struggled.

The trust's strict language is the biggest con, Cooley says.

"For a couple of years, people felt like they were in the roach motel," he says. "They got in and they couldn't get out."

In fact, a Giftrust investor did get out by taking the company to court. But that is a long, expensive process that few investors are willing to go through.

Despite its recent problems, Giftrust's track record has been stellar. From 1985 to 1995 it ranked as a top performer, averaging an annual return of 25 percent.

"It was great," Cooley said. "It was definitely a sustained record of excellence."

The fund struggled in 1996 because its aggressive investment style flopped.

Giftrust is a "momentum" fund, which means it invests in small and medium-size companies whose earnings and revenues are accelerating along with their stock prices. It sells quickly when the trend reverses, and looks for other hot companies to invest in.

Investing in small companies makes the fund volatile and highly aggressive.

Giftrust suffered in 1996 as money flowed into big companies, and small company stocks languished. Its management team carried a heavy load, too, overseeing two other funds and institutional products.

In letters to shareholders, the company apologized for the poor performance, and promised to make things better -- a rare move by a fund company.

In 1998, the company trimmed the Giftrust management team's responsibilities, added three analysts and brought back a money manager who had been with the firm for 10 years before leaving to run a hedge fund.

The company also made it tougher for investors to get into the fund by raising the minimum investment to $2,500 from $500.

"People getting into it need to realize what they are getting is a very aggressive fund," Doyle says. "Many people didn't understand that. This isn't a [certificate of deposit]."

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