by Scott Burns

       Some ideas succeed because they are simply wonderful. One of my favorites is charitable gift funds. The first was launched 15 years ago by Fidelity Investments. It was quickly followed by similar vehicles from Schwab, Vanguard and others.

        According to its most recent report, the Fidelity Charitable Gift Fund had $4.6 billion in assets at the June 30 end of its fiscal year. It also had 41,818 donors.
But the truly important numbers are about what goes out, not what goes in--- the giving accounts donated $995 million to over 56,000 nonprofit organizations in the same period, up 26 percent from the previous year.

        If you aren’t familiar with charitable gift funds, here is how they work. You make a gift of securities or cash to the fund. You get a tax deduction for the donation. If you gave appreciated securities, you also avoid paying capital gains taxes on the unrealized appreciation. The fund sells the securities and provides choices for investing the money. Every dime of future income or gain on the new investments will be more money available for gifting, free of taxes.

        Then you can start scheduling your gifts, arranging for monthly checks to go to any number of charities or nonprofit organizations. Your gifts can go with your name on them. Or they can be anonymous. At the Fidelity Charitable Gift Fund, your gifts can be in amounts as small as $100.

         Last year Fidelity reduced the annual fee for managing the fund down to 60 basis points--- that’s 0.60 percent--- while reducing the minimum for establishing an account to only $5,000.

        Is this a great country, or what?

        Now anyone can be a philanthropist, even an ink-stained journalist. (My wife and I started our fund last year when I retired from The Dallas Morning News. We chose the Fidelity Charitable Gift Fund because I have long admired the creativity and innovation that Edward C. Johnson III, Chairman of Fidelity, has brought to investing.)

        Our investment choices were simple--- something like my Margarita portfolio. We put one-third of the money in a money market fund, one-third in the Total Domestic Market Index Fund, and one-third in a pool of managed funds that invests overseas. As a devoted indexer I would have preferred investing in an international index fund, but the choice wasn’t available last year.

        But that was then.

        As of September 30th, Gift Fund investors also have a choice of investing in Fidelity’s International Index Pool--- its Spartan International Index Fund. It has a voluntary expense cap of only 7 basis points. The Fidelity Spartan 500 Index Fund, also with expenses of only 7 basis points, is another new choice. So it is now possible to have a charitable gift fund with a total delivered cost of only 67 basis points.

        The change may also be one of the strongest, if reluctant, endorsements for index investing in decades. Fidelity Investments, the stock pickers shop, has caved in to market demand for low-cost index funds. Imagine hell, filled with flying pigs throwing snowballs.

        An examination of the September 30 report on its managed pools shows that one of the deepest pools of investment talent in the country, free to select virtually any managers in the world, is deeply challenged when it comes to picking managers that would beat its index benchmark.

        In the 12 months ending September 30, the managed international pool provided a return of 26.70 percent, 4.01 percent behind its index benchmark. That figure is net of all fees, including the cost of managing the gift fund. But the adjusted performance shortfall is still over 3 percentage points. This happened in spite of hand-picked primo funds, such as Harbor International and Fidelity International Discovery.

        The Equity-Income Pool, which includes star funds such as Fidelity Contrafund and Fidelity Low-Priced Stock Fund, returned 16.04 percent a year over the five-year period while its benchmark returned 17.71 percent. Again, even after adjustment for gift fund costs, the managed funds failed to beat a passive-index benchmark. Similarly, the Interest-Income II Pool of managed funds--- which includes star funds such as PIMCO High Yield Fund and PIMCO Total Return Fund--- only matched its benchmark over the last year.

        Is this a definitive trouncing of managed funds?

        Hardly. Some of the pools of managed funds beat their benchmarks. The All-Cap Equity Pool led its benchmark by 1.51 percentage points, even after the cost of the gift fund. And the Growth Pool, a group of 14 Fidelity funds, beat its benchmark by 1.16 percent, even after the cost of the gift fund. In any case, the measuring periods are short.

        So what does it mean?

        It means beating low cost indexes is no slam-dunk. That’s why we should be wary of choosing managers ourselves and why we should think of flying pigs when members of the sales force tell us how easy it is. It’s also why index investing is a good choice.

On the web:

March 17, 2007: How to Give and Spend More in Retirement: