FIDELITY LOOKS GIFT HORSE IN THE MOUTH AND FINDS IT LACKS TEETH, NEEDS REINS: WHAT BULL MARKET? CHARITABLE FUND LAGS

Fidelity Investments’ Charitable Gift Fund is often hailed for its do-good mission, but the fund’s investment managers could do better.

Because it is registered with the Internal Revenue Service as a charity, the $1.3-billion Charitable Gift Fund — on which Fidelity recently imposed new restrictions as to how donors may direct their contributions — does not have to report its performance to daily newspapers. Nor is the fund monitored by such mutual-fund trackers as Lipper Analytical Services of New York or Chicago-based Morningstar Inc., even though its assets are invested in other Fidelity funds.

Fidelity does, however, reveal the fund’s performance in a quarterly report sent to its 12,837 donors. A copy of the most recent report makes it clear that the Charitable Gift Fund is missing out on the runaway bull market — even though Fidelity reconfigured three out of four of the fund’s benchmarks in March to bring them more in line with the different investment objectives of the fund.

Fidelity spokeswoman Anne Crowley maintains that the fund’s investment record is secondary to its charitable mission. “People who are donors are not using the fund to make money,” she says.

more the merrier

True. But the better Fidelity does in managing that money, the more there is to disburse to charities. During its six-year lifetime, the Charitable Gift Fund has disbursed $650 million to more than 50,000 charities, including $195 million to 16,000 charities in 1997.

It is the nation’s 12th-largest charity in terms of assets. The Gift Fund offers customers four separate asset pools: growth, equity-income, bond and money market. While donors can dictate how much money is invested among the four accounts, Strategic Advisers Inc., a unit within Fidelity, makes recommendations to the fund’s trustees about how to allocate the money within those pools.

In 1997, all four of the pools underperformed their Fidelity-chosen benchmarks. The growth pool, with $426 million in assets, posted a 15.59% return, significantly behind its benchmark’s 26.54%.

Meanwhile, the average growth mutual fund earned 25.31% in 1997.

The fund’s $532-million equity-income pool earned 24.60% in 1997, compared to 34.83% for the Russell 3000 Value Index, its benchmark.

Things haven’t improved much this year. Through June 30, three of the four pools had underperformed their benchmarks. The growth pool, for example, returned 14.88% over the first six months of 1998, vs. the benchmark’s 15.56%. A mutual fund with the same performance would have ranked in the lower half of 1,017 growth funds tracked by Lipper.

pools make little splash

The $96-million bond pool returned 2.99%, vs. its benchmark’s 4.05%; and the money-market pool, with $254 million in assets, posted a 2.15% gain, compared to its benchmark’s 2.38%.

Only the equity-income pool beat its benchmark, returning 13.38% to the Russell 3000’s 11.40%.

The lackluster investment results come amid changes in the operation of the fund. Fidelity recently imposed new restrictions on the ways in which donors can direct their contributions. The changes follow widespread criticism that some of the fund’s donors have used the fund to benefit themselves instead of others.

First, Fidelity informed clients that it would not allow new donors to make grants to private foundations. The fund will consider making disbursements to private foundations for existing donors until 2002.

Fidelity has also prohibited donors from giving to foreign charities, presumably because such gifts are more difficult to police.

The company also promised that it will distribute at least 5% of the gift fund’s assets each year — a moot point considering it currently disburses 20% of its assets annually.

Stacy E. Palmer, editor of Chronicle of Philanthropy, a Washington-based industry newsletter, says the changes aren’t likely to hurt the fund’s popularity.

“They make giving to charity pretty simple,” she says of Fidelity. “Plus, they have the apparatus to do the kind of marketing that most charities just aren’t able to do.”