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Funds in Focus – USAA First Start Growth

The USAA First Start Growth fund is not just a run-of-the-mill mutual fund. It’s not a stand-alone fund like you would buy from, say, Vanguard or Fidelity or any other fund company. Instead, the First Start Fund is part of a broader program -- the USAA First Start program -- designed to provide military families with a convenient and practical way to teach children about money, and for young families to get started in their own investment program.

First Start Overview

The First Start program includes several products and services designed to get to your money – through your children.

First of all, USAA’s First Start Savings allows you to open a child’s savings account with just $25. This isn’t a terribly unusual thing for a bank to do – they are all interested in gaining your childrens’ loyalty as early as possible. Many times, children become lifelong customers. Banks know this, including USAA, which has a very good marketing team. These youth accounts come with an ATM card (if you allow it), and online access – conveniently on the same site as yours, if you’re a USAA customer. You don’t get the convenience of local branches, but USAA waives up to 15 dollars each month in other banks’ ATM fees. And you can make deposits via a scanner.

You can also get a pre-paid credit card for your child. This is a debit card that you can load up with money that your child can use like a regular VISA. But she can’t spend more than you put on it. This is a safer, more secure alternative than cash. Cash can’t be replaced when lost. But your child’s card can. There are no fees on this card – it’s free. You can charge it online or by phone.

The Fund’s Portfolio of Investments

Don’t compare First Start Growth to an S&P 500 index fund. The fund holds over a third of its portfolio overseas or in bonds. So we would expect the fund to underperform the U.S. stock market when U.S. stocks are dominating the market, and we would expect the fund to do very well compared to U.S. stocks when U.S. markets are weak, when European equities eventually begin to recover, or when emerging market stocks are rocking. And because the fund combines different asset classes (U.S. large caps, bonds and foreign stocks).

The First Start Growth Fund is much closer to what we call an asset allocation fund. This means that the fund managers attempt to balance their holdings among different asset classes. An asset class is a group of securities that are similar to each other in structure and/or locality and tend to move in the same direction, up or down, at the same time. For example, when interest rates rise, nearly everything in the fixed income asset class (bonds, primarily) will tend to fall together.

First Start Growth is a one-stop shop for several asset classes: Large-cap U.S. stocks, small-cap U.S. stocks, bonds and emerging market stocks. Asset allocation managers – like First Start – try to add value by increasing holdings or throttling back in a given asset class based on their outlook for that particular asset class. When interest rates are low and poised to rise, asset allocation managers will roll back bond holdings. When stocks look cheap compared to earnings and growth projections, they will look to sell off other asset classes and buy stocks.

Looked at more broadly, the fund tries to strike a balance between stocks and bonds, and will typically hold between 20 and 80 percent of its portfolio in bonds, depending on market conditions (though we would raise our eyebrows at any fund designed for children that went that strongly to fixed income investments at any one time.)

The fund also diversifies into European and emerging market stocks – though it makes little attempt to actually identify the best holdings abroad. Its largest holding, far and away, is the iShares MSCI ETF, which is essentially some other company’s European index fund, is far and away the largest holding, at more than 10 percent of the portfolio. And, strangely enough, its number two holding is the same index, but via an ETF from the Vanguard company, for a total of more than 18 percent of the fund devoted to holding indexes.


USAA positions this fund specifically for young families with small portfolios, just starting out, on potentially limited incomes. For example, they keep the fund minimum investment low, to make it affordable for families on a tight budget to jumpstart their mutual fund investing program.

Really, it’s a no-brainer. You can set up automatic investing for as little as $20 per month.

Why is this important? Because it is difficult for a family on a limited budget to make monthly minimum investments on four different funds to achieve diversification across several different asset classes, as you can with USAA’s First Start Growth. If you only have double digits per month to invest – and that includes a lot of families these days – First Start Growth is one of the few mutual funds available that will let you invest across so many asset classes in a single transaction in a way that’s actually affordable.


There ain’t no such thing as a free lunch, though – and there is a price to be paid for being so accessible. Despite the high allocation to low-expense ETFs, First Start’s posted 1.47 percent expense ratio is quite a bit higher than the category average of 1.02 percent, according to – one of the leading clearinghouses of mutual fund data. It’s a solid option when cash flow is very limited, but if you’re able to sock away $250 to $333 per month or more (the monthly rate it takes to fully fund an IRA maximum contribution of $5,000 per year), there are more efficient options out there, even at USAA. Furthermore the fund’s managers churn the portfolio quite a bit. The fund’s turnover ratio is 122 percent, also according to Morningstar. This means that, on average, every holding in their portfolio gets bought or sold 1.22 times per year. Every time the fund makes a profitable trade, the investor gets slapped with a capital gains tax bill (except in Section 529 plans. And also IRAs, but we don’t think there are that many kids contributing earned income to a retirement fund). As a result, the fund suffers when you take after-tax returns into account. But since few military members have incomes high enough to move them from the 5 percent capital gains tax income bracket to the 20 percent, that hasn’t been a huge problem. (It will be more of an issue, however, come 2013, when we see a significant increase in capital gains tax rates, unless Congress sooner intervenes.)

To insulate yourself from the capital gains tax issue completely, though, you can hold the find in a retirement account – and then the high turnover is simply a non-issue.


The fund’s tilt towards value helps take the edge off of troubled times, and the holdings tend to be established companies with strong balance sheets. The fund pays a healthy (taxable) dividend of just over 2 percent. The fund’s sound asset allocation practice means it’s not going to shoot out the lights any time soon, but you also probably won’t get clobbered as bad in tough markets as you would if you held everything in, say, the USAA 500 Index Fund, the Vanguard 500 fund, or the C Fund in your Thrift Savings Account.

If you are looking to hold a kid-friendly mutual fund – and be able to use the fund as a jumping off point to talk to children about money, there’s nothing wrong with holding the iShares MSCI ETF, the Vanguard MSCI ETF and, if you like USAA, the USAA 500 Stock Index Fund.


If you like having a lot of tools for kids, and you’re looking for something to help you get your children engaged in the world of investing, check out the Monetta Young Investor Fund. It’s a more concentrated portfolio, and likely to be a bit more volatile. Its performance over the last five years – 8.8 percent, annualized, dwarfs that of the S&P 500 index (0.72 percent) and that of the USAA First Start fund (2.83 percent) and lands it in the top 1 percent of the funds in its category. Yes, it, too, holds a lot of assets in indexes and ETFs. But the lower turnover and more reasonable expense ratio of 1 percent is a lot easier to swallow. Plus, the Monetta has a lot of cool educational tools and resources of its own designed for children of different age groups. You can open an account with Monetta with an initial contribution of $100 minimum initial investment, too, plus a $25 monthly automatic draft. That’s a bit lower than USAA’s $250 minimum initial investment, if cash flow is tight (if things are really that tight in your house, though, you might consider shoring up your emergency fund of cash first before investing in either Monetta or USAA mutual funds!)

Be warned – unlike the USAA First Start Growth, which holds bonds as well as stocks, the Monetta Young Investor Fund is a pure stock play. Volatility will be higher. Expect bigger good years and rougher bad ones, overall. If you’re looking for a fund to pay college expenses less than five years or so away, the Young Investor Fund probably isn’t it.

If you aren’t worried about the tools for kids (USAA makes them available on its website regardless of whether you buy shares in First Start Growth or not) you can use your TSP to hold very low cost indexes in U.S. equities and fixed income – and build the rest of your portfolio around the core holdings in the TSP. One idea: Open a Roth IRA account with USAA and hold shares of the USAA 500 index, plus the USAA Extended Market Index Fund, which holds most publicly traded US stocks that aren’t included in the S&P 500 index. This extends your reach into mid and small cap stocks in the U.S. Season to taste with the USAA International Stock Fund and a little bit of the Emerging Markets Fund, and you’ve covered most of the bases, for a somewhat lower average expense ratio. Then rebalance whenever you get a little out of whack.

This approach is going to require you to write bigger checks, though, because of minimum investment requirements. It does little good to embark on an investment strategy you cannot sustain.

Alternatively, if you want a one-stop shop approach to investing, you may investigate USAA’s Target Retirement Fund Series. You pick the date you plan to retire, and USAA does the asset allocation to reflect your time horizon.

Contributed by Jason Van Steenwyk

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