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Financial Planning > Charitable Giving > Donor Advised Funds

How Donor-Advised Funds Can Amp Up Their Giving Power

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When you think of donor advised-funds or sustainable investing, you probably don’t think of a 1,600% gain in a single investment. But that’s exactly what happened for investors in ImpactAssets’ donor-advised fund.

Its Giving Fund was an early investor in Beyond Meat, the maker of plant-based meat substitutes, through its Custom Investment program, providing it access to the most successful inital public offering year-to-date with the biggest first-day gains since at least 2008. Its early investment in Beyond Meat of $1.1 million turned into $16.9 million by the close of trading on the IPO’s opening day.

That investment exemplifies the Giving Fund’s dual purpose: to provide donations to philanthropic organizations based on investor preferences while also investing in assets to have a social impact.

“There are about $120 billion in donor-advised funds,” explains Ron Cordes, co-founder and CEO of AssetMark investment Services, who now runs the Cordes Foundation with his wife Marty and daughter Steph Stephenson and chairs the executive committee of ImpactAssets.

“By in large those donor-advised funds are used almost exclusively for philanthropy … giving away 15% plus per year of the assets … But our question is what are they doing with the other 85%?” asks Cordes. “Almost across the board, just like traditional foundations, that money is just invested conventionally … Most clients don’t realize in a donor-advised funds that you can not only give away money to the things you care about, you can also invest it in the things you care about as well.”

ImpactAsset’s DAF is focused on that 85%, but a growing number of DAFs now also offer sustainable investment options.

Fidelity Charitable, the largest DAF with $27 billion in assets as of June 30, 2018, added three impact investment pool options in 2018 for a total of four. That same year Fidelity Charitable allocated $936 million to impact investments — in those pools and in managed accounts —  which accounted for over 20% of all the grants its DAF investors made last year.

“Investors typically come [to DAFs] to make grants, not to check on investment performance … but we have the opportunity to reframe the use of money, to open up to more impact investments,” explains Sarah Gelfand, vice president, Social Impact Programs at Fidelity Charitable.

Kim Laughton, president of Schwab Charitable, says she’s also seeing an increasing demand for socially responsible investment choices in the firm’s DAF, which offers two SRI pools among its 13 investment options plus a money market fund: The Pax Balanced Individual Investor and Parnassus Core Equity funds. Both funds are from asset managers long active in socially responsible investing.

Socially responsible and ESG-focused investments are “one of the fastest growing categories” of assets in Schwab’s DAF, says Laughton.

“There is a sea change afloat for the deployment of capital for impact investment,” says Fran Seegull, executive director of the U.S. Impact Investing Alliance, noting the coming wealth transfer to women and millennials, who tend to be big supporters of socially responsible investing.

“DAFs would seem to be a very ripe area for impact … Investors want to invest in DAFs that are consistent with their values and mission that will allow capital to push above its weight in compelling ways.”

On the flip side, DAF investors “don’t want their DAF’s investable assets to contribute to the problems they’re trying to solve with your charitable assets,” says Brad Harrison, co-head of impact at Tiedemann Advisors, which has $20 billion in assets under advisement.

If DAF investors are not getting the investment options they want, they can always switch to another DAF.

Harrison says he’s seeing increasing interest in community foundations establishing DAFs to support local economic development and neighborhood connections. “Community foundations are well positioned to make impact investing options available for the DAF holders to invest locally.”

Vikram Gandhi, a former Wall Street investment banker who now teaches a course at Harvard Business School that focuses on return, risk and impact investing, also sees investment opportunities for DAFs that go well beyond the usual ESG funds. Targeted private investments have the potential to deliver impacts that are much greater than those available in the public markets, says Gandhi.

And the potential to deliver much larger gains, providing even more money to donate to philanthropies.


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