Morningstar - Q3 2021 - 58

Strategies
balances up to $500,000. All three have tiered
expense structures, so accounts with balances
greater than $500,000 are subject to lower
fees in percentage terms.
These charges are in addition to the fees on
the underlying investments (operating expenses
for mutual funds and exchange-traded funds,
or trading commissions for individual stocks and
bonds). All these fees come out of the amount
donated, making donor-advised funds less
cost-efficient than donating directly to a charity.
Grants made to charities are also subject to a
minimum donation amount. Schwab and
Fidelity both require minimum grants of $50, while
Vanguard requires a minimum of $500 for
each grant. The account administrator must also
approve each grant before funds are disbursed.
As a result, investors who want to donate
smaller amounts in cash might find it easier and
more cost-effective to make donations
directly, especially if they often contribute to
the same charities every year.
Some wealthier families and individuals
might prefer to set up a private foundation to make
charitable donations. A private foundation
is a separate legal entity that has its own articles
of incorporation, bylaws, and board of directors
or board of trustees. Unlike donor-advised funds,
foundations are required to file annual tax
returns and distribute at least 5% of the previous
year's average assets each year, but also have
additional flexibility for making grants. For
example, a private foundation can provide
scholarships and fellowships directly to individuals,
make direct grants to families or individuals
facing hardships and emergencies, and run its
own charitable programs.
Comparing the Options
EXHIBIT 1 shows how three of the largest
donor-advised funds stack up. Fidelity and Schwab
are accessible to the widest swath of investors
because they don't require a minimum
amount for initial contributions or additional
contributions, but Vanguard offers lower
administrative fees for higher-balance accounts.
All three donor-advised funds offer a range
of investment options, including both diversified
58
Morningstar Q3 2021
asset pools with exposure to a range of asset
classes, and single-asset-class pools that
can be used as building blocks for donors to put
together their own portfolios. Fidelity and
Schwab offer both in-house funds and third-party
offerings. Vanguard's lineup consists almost
exclusively of in-house funds, but nearly
all the investment options are index funds with
ultralow expense ratios. Let's dig into the
underlying investment options for the three major
donor-advised funds in more detail.
Fidelity Charitable Gift Fund
Fidelity Investments Charitable Gift Fund is the
big kahuna of donor-advised funds. Created in 1991,
the fund is the largest donor-advised fund in the
United States. It even outweighs the Bill and
Melinda Gates Foundation based on the value of
grants made for the most recent fiscal year. Assets
totaled $34.5 billion as of June 30, 2020.
Fidelity Charitable doesn't require a minimum
contribution amount to set up a new account or to
make additional contributions. Donors can make
grants in any amount of at least $50. Fidelity
Charitable, like all donor-advised funds, also comes
with an additional layer of administrative costs.
The fund charges a 0.6% annual administrative fee
(or a flat fee of $100, whichever is greater) for
accounts with balances up to $500,000. Accounts
with balances greater than $500,000 are subject
to lower fees in percentage terms.
Fidelity Charitable's fee structure is slightly
different from those of Schwab and Vanguard. For
accounts with asset values of $5 million or
more, it charges a flat fee that applies to the entire
account balance instead of a tiered fee structure
that applies different fees to different portions
of the asset total. Investors with larger account
balances will likely end up paying lower fees
at Fidelity compared with Schwab, although fees
aren't quite as low as those offered by
Vanguard's Charitable Endowment program.
These charges are in addition to the fees on
the underlying investments (operating expenses
for mutual funds and exchange-traded funds,
or trading commissions for individual stocks and
bonds). All of these fees come out of the
amount donated.
Fidelity Charitable offers four main investment
pools: diversified asset allocation pools
based on the Fidelity Asset Manager series,
single-asset pools for a variety of asset
classes, sustainable and impact investing pools,
and a Charitable Legacy Pool for investors
who anticipate passing the fund along to their
heirs. The lineup mainly consists of Fidelity
offerings but also includes several funds managed
by third-party managers. Overall, the
underlying options are relatively strong, although
operating expenses are higher, on average,
than those on investment pools offered by the
Vanguard Charitable Endowment.
Asset-Allocation Pools
The asset-allocation pools offer a diversified
mix of equities and fixed-income securities, with
risk levels ranging from conservative to more
aggressive. The target equity allocations
range from 20% to 85% of assets. Although the
underlying Fidelity Asset Manager funds are
actively managed, they typically don't stray
too far from their target allocations. Funds in the
series have landed fairly close to their custom
benchmarks over time and earn Morningstar
Analyst Ratings of Bronze or Neutral.
Single-Asset-Class Options
For investors who prefer to build their own
portfolios, Fidelity Charitable offers a variety of
funds covering both active and passive
vehicles. The lineup includes both in-house funds
and third-party offerings with Analyst Ratings
ranging from Bronze to Gold.
Sustainable/Impact Investing Pools
Fidelity Charitable offers four pools geared toward
investors who want to include social and
environmental factors. The two passive offerings-
Fidelity U.S. Sustainability Index FITLX and
Fidelity International Sustainability Index FNIDX-
track the U.S. and international versions of the
MSCI ESG Leaders Index, which focuses on
companies with high ESG performance relative to
their sector peers, based on MSCI's research.
Pax Global Environmental Markets PGINX is an
actively managed fund that invests in companies
focusing on areas such as alternative energy,
water infrastructure technologies, waste
management technologies, and sustainable food,
Morningstar - Q3 2021

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