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Charitable Funds Aim at Wealthy Investors


Fund companies are courting new investors, especially high net-worth investors, with charitable gift funds according to mutual fund consultants and charitable fund managers.

With one in three households already investing in mutual funds, there are a limited number of potential investors, said Mary McAvity, a consultant with Cerulli Associates of Boston. With a charitable fund, a company can provide a type of investment not currently offered by most other fund companies, she said.

In 1992, Fidelity Investments of Boston became the first fund company to offer a donor advised charitable fund, according to Cynthia Egan, president of Fidelity's Charitable Gift Fund. Since its launch, approximately 40 percent of the funds' investors are new to Fidelity, she said.

Charitable funds are a relatively untapped market. Only a handful of fund companies currently offer them. But, that may change soon, according to Burton Greenwald a mutual fund consultant and president of B.J. Greenwald & Associates of Philadelphia.

"I think you will see more of these types of funds in the future," said Greenwald. I think most major fund groups will have them."

Contributing to their popularity is investors' growing awareness of the funds, Egan said. Educating investors on charitable funds was a considerable challenge that is beginning to pay off, said Egan.

The major fund companies offering charitable funds include: Fidelity, The Vanguard Group of Malvern, Pa., Charles Schwab of San Francisco and American Guaranty & Trust of Wilmington, Del.

Vanguard's charitable fund was started in late 1997 while Schwab and American Guaranty & Trust launched charitable funds in September 1998 and Sepetember 1999, respectively.

Charitable funds usually require investors to make an irrevocable donation of cash, securities or mutual fund shares that are then invested in a mutual fund. The initial donation is tax deductible. For some charitable funds, donors can recommend the charity towards which they want their investments to go.

Donor-advised charitable funds are attractive to fund companies because they generate management fees, attract high net-worth investors seeking tax shelter and they are a worthy philanthropy, Greenwald said.

An increasing number of high net-worth investors are reaching an age when they have estate planning needs, Greenwald said. Protecting assets from taxes in a charitable fund makes sense to many of them because they are making a savvy investment decision and serving a good cause.

The bull market makes charitable funds an even more logical solution to many investors. Strong market performance and huge capital gains are driving forces in Vanguard's charitable endowment program's success, according to Pierce.

"There is tax planning going on and there are individuals with highly appreciated stocks and mutual funds who are looking to make a donation," he said.

Charitable fund investors can reap huge tax benefits. For instance, an individual in the 31 percent tax bracket investing $10,000 could save up to $3,100 in federal taxes. Investors may deduct on their federal taxes 50 percent of cash gifts and 30 percent of donations of securities and property.

Marketing for charitable funds generally follows typical non-profit strategies of direct mailings and web sites, Egan said. However, advertisements in magazines and newspapers are not uncommon, Greenwald said.

Not surprisingly, there is generally a deluge of year-end donations as investors determine their annual earnings. Fidelity receives half of all its donations in the last quarter of the year, Egan said. Fifty percent of the $70 million dollars the Vanguard charitable endowment program received last year came in the last month and a half of the year, according to Pierce.