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Giving that Gives Back

by Kathleen Nemetz, MBA, CFP ®

Registered representative of McClurg Capital, Member FINRA & SIPC

It’s the giving season again, when many investors explore whether their choices of investments can grow for the good.


If you have thought about how to nurture your nest egg and Christmas cheer, too, this article is for you.


First off, it’s important to define what is meant by socially responsible investing. There are literally dozens of publicly traded funds that ascribe to principals for filtering investments based on myriad criteria, rather than just performance.


The idea is to make a difference for a better world, by directing capital into socially beneficial areas of the economy. Depending on your own beliefs and values, you may favor investments oriented toward the environment, as an example, or that consider fair trade practices for third world countries. Still other investments may be guided by religious values.


Applying these criteria, some individuals may prefer actual stocks and bonds for these types of investments, selecting companies, for example, that donate a large percentage of their profits to the community or to charities. Or investors may prefer to buy municipal bonds to build or maintain schools, thus supporting education goals.


Other investors may wish more diversification than can be afforded by use of a single company stock or bond issuer.  Unless they have large portfolios to work with, prudent investors may instead focus on a select group of mutual funds.


Whatever the criteria, performance of the underlying investments can and should be considered. Surprisingly, socially responsible mutual funds have largely performed well this year, as shown in a Bloomberg ranking, perhaps because these funds mostly go light or avoid energy holdings.  To see the report for yourself, for data through November, 2015, visit http://charts.ussif.org/mfpc/.


Holding an actual mutual fund may mean you will experience taxable distributions of capital gains, so keep this in mind when choosing a fund over an actual stock or ETF.  ETFs and funds also do not perform equally well in all market conditions.


If you favor stocks, you may find it useful to determine which publicly traded companies donate the largest amounts of cash or percentages of their profits to the community. Or which are headed by executives who donate their personal fortunes to charitable causes. This date can be found for instance on the website of the Chronicle of Philanthropy, and at the website for Giving USA.  As an example, a 2014 study showed the list of the 50 most generous donors , called “the Philanthropy 50,” to include many tech executives, including Google co-founders Sergey Brin and Larry Page. The study was done by Indiana University with a grant from the Lilly Family Philanthropy Fund.


The same study showed that individuals account for 72% of gifts made to charities, in the United States; corporations account for just 5% of gifts and foundations another 15%. Finally, bequests, also made by individuals as well as trusts, account for the remainder.


Tax benefits


Investors in higher tax brackets may wish to mix their objectives, to lower their tax bills while investing for the good. Donor advised funds for instance may be set up according to screening criteria for investments, and the income from the resulting portfolios can be donated to a variety of nonprofit organizations. Community foundations offer a turnkey way to set up this type of giving, using mutual funds they manage. Donors can also set up such funds themselves.


Finally, for people looking for even bigger tax breaks, a conversation with an estate planning attorney may be in order. Charitable lead and remainder trusts may offer a way to combine objectives for investing with the heart, for giving to a cause, and getting a tax break, besides.  These types of trusts are not just for the elderly. Many executives of tech startups use them to diminish their tax bills when taking companies public, and when exercising their options on shares. Trusts are not inexpensive to administer however. Be sure that the portfolio size matches your ambition for giving, to make this approach worthwhile.


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