We examine Schwab Charitable's ongoing fees and underlying investment offerings.
By Karen Wallace | 11-07-17 | 05:00 AM | Email Article

Editor's note: Last week, we examined Fidelity Charitable's investment menu and fees. In this article, we'll go under the hood at Schwab Charitable, and next week we'll take a look at Vanguard Charitable. Finally, we'll compare all three to see how they stack up.

Karen Wallace is a senior editor with Morningstar.com. Follow her on Twitter @KarenW60602.

Donating money to charities through donor-advised funds has become increasingly popular over the past decade. According to data from the National Philanthropic Trust's Donor Advised Fund Report, for the sixth consecutive year, there was growth in all key metrics: number of individual donor-advised funds, total grant dollars from them, total contributions to them, and total charitable assets in them. According to the report, overall assets as of the end of 2015 were nearly $79 billion. Contributions during the year totaled $22 billion, and total grants to charities during the year totaled $14.5 billion. 

As you can infer from this data, not everyone disburses their charitable contribution right away. As of now, there is no set time frame during which you have to pay out the funds; the donation you make can sit in the donor-advised fund account indefinitely. In fact, you can pass the account along to your heirs. 

This flexibility is perhaps the biggest advantage of a donor-advised fund from a strategic tax-planning perspective: You can make donations to the account and receive immediate tax benefits for doing so while being allowed to disburse the money from the accounts according to your own timetable. In other words, you can choose to pay out a donation to an approved charity right away, or invest the money in the donor-advised fund account and let it grow tax-free until you want to pay it out. Either way, you get an immediate tax deduction. And though you cede control of the assets, you retain advisory privileges over how the account is invested, and how the fund distributes money to charities.

According to data from Fidelity Charitable, the nation's largest charity by donations received during the year, for every $100 contribution, $38 is disbursed during the first year. Over the medium term, five years, $74 of that original contribution is paid out to charity. By 10 years, $88 has been paid out, leaving 12% of the original contribution invested for the long term. 

Because the funds in donor-advised accounts aren't used simply as way stations for getting money immediately into a charity, my next question was, how do the underlying investment menus rate? And how much will investors end up paying in fees and expenses? (Investors in donor-advised funds pay annual administrative fees on account balances, and investors also pay fees on the underlying investments. Though not typically onerous, all of these fees eat away at the overall charitable donation, and direct investments to charity would not face the same fee burden.)

Schwab Charitable
Minimum donation level required to set up an account: $5,000
Annual administrative fees: the greater of $100 or 0.6%; expense breaks on balances greater than $500,000

Schwab Charitable offers three investment pools: the pre-allocated pools, single asset class pools (index and actively managed), and the professionally managed account option that is available to those with accounts exceeding $250,000. 

One feature I like about the Schwab Charitable website is this asset allocation calculator, which helps investors determine the right asset mix based on their time horizon, risk tolerance, and investing knowledge level. 

Pre-Allocated Pools
The pre-allocated pools are designed to offer diversified exposure to multiple asset classes in a single investment. There are four pre-allocated investment tracks with Schwab Charitable: conservative, balanced, socially responsible balanced, and growth.

The conservative pool uses  Manning & Napier Pro-Blend Cnsrv Term S , a Bronze-rated balanced fund with an equity allocation that can range from 15%-45% (it's currently about 35% U.S. and foreign stocks, and 70% bonds). Jeff Holt, associate director of multiasset strategies in our manager research group, gives the fund praise for its long-tenured management team and well-reasoned investment approach, though the fund's expenses are about in line with the peer group average.

Holt describes the fund's approach, which has been in place "for decades": Manning & Napier's fundamental research is applied to both equities and corporate bonds and seeks to uncover three types of companies. "Strategic profile" picks are industry-leading firms with sustainable competitive advantages and reliable cash flows (similar to Morningstar's economic moats). "Hurdle rate" stocks are expected to emerge as industry leaders following a cyclical slump. "Bankable deal" picks are deep-value opportunities that the managers think are set for a turnaround. If the managers can't find sufficient opportunities in stocks, the fixed-income team invests the assets in bonds. The bond team determines the duration, yield-curve positioning, and security selection of fixed-income allocation.

The pre-allocated balanced pool uses  Janus Henderson Balanced T , a Neutral-rated fund that starts with a 60% stock/40% bond allocation, but it has deviated when management thinks it's warranted (it's currently around 60/33/4 stock/bond/cash). The fund was downgraded to Neutral from Silver in 2016 owing to significant management changes; at the end of March 2016, Gibson Smith, this fund's comanager since 2005, left the firm. Smith joined Janus in 2001 and had served as the CIO of its fundamental fixed-income team since 2006. This was a significant blow to Janus' fundamental fixed-income platform, which Smith built during his CIO tenure, says senior analyst Greg Carlson. Though longtime comanager Marc Pinto remains and the managers replacing Smith (Darrell Watters and Mayur Saigal) are experienced, the loss of Smith is significant.   

The socially responsible option in the pre-allocated investment pools is Pax Balanced Fund Individual Investor Class ; the fund invests 50% to 75% in stocks, with 25% to 50% in bonds. Longtime manager Christopher Brown typically devotes 15% to 20% of the assets to foreign stocks and 20% to 25% of the assets to smaller-cap names, so this fund can function as an all-in-one hybrid vehicle. Though we don't currently assign an Analyst Rating to the fund, its performance over most time periods has been middling or below average, though it tends to hold up well in tough markets such as 2008, 2011, and 2015. Its fee level is average. 

The growth pool allocates its assets to American Century Investments One Choice Portfolio: Aggressive Investor Class , which falls into the Allocation--70% to 85% Equity category. These portfolios are built using an assortment underlying American Century mutual funds diversified across a mix of stocks, bonds, and cash equivalent investments. We do not currently assign an Analyst Rating to this fund, but we do cover eight of the top 10 underlying funds (which is more than three quarters of the fund's assets). Of those eight, only two are not rated Neutral by our manager research analysts: Bronze-rated  American Century Diversified Bond Inv  and Silver-rated  American Century Mid Cap Value Inv . The fund's fees are in line with the peer group average. 

Single Asset Class Pools
Schwab Charitable also offers single asset class pools that feature Schwab index funds (which often have extremely competitive expense ratios) and actively managed options from other asset managers. These pools can be used in combination by investors who prefer to be more hands-on with their investment selection and allocation recommendations. 

Schwab's index-trackers offered are priced very competitively and cover a lot of ground: Schwab US Aggregate Bond Index tracks the Bloomberg Barclays US Aggregate Bond Index;  Schwab Total Stock Market Index tracks the Dow Jones Total Stock Market Index, which holds nearly every investable U.S. stock;  Schwab International Index tracks the MSCI EAFE Index; Schwab Small Cap Index tracks the Russell 2000 Index; and Schwab Treasury Inflation-Protected Securities tracks the Bloomberg Barclays US Treasury Inflation-Protected Securities Index.

The actively managed options are fairly solid overall, with one exception: We think investors could find better short-term bond options than  Principal Short-Term Income . Though the fund is inexpensive and has a straightforward process, the experienced team is spread thin, earning the fund a Morningstar Analyst Rating of Neutral, says Morningstar analyst Brian Moriarty.

Gold-rated  Metropolitan West Total Return Bond's  more conservative profile has resulted in decent, though not stellar, returns compared with peer funds during the past few years, says associate director of fixed-income strategies Karin Anderson. Though the current portfolio's duration is slightly short of the benchmark and it devotes less than 5% to below-investment-grade securities, prospective investors should be aware that the managers have a wide latitude to adjust the fund's duration and credit exposure. Duration can run anywhere from 2 to 8 years, and the fund can hold up to 20% of assets in below-investment-grade securities. But the managers dial risk up and down in predictable fashion based on their disciplined approach to valuations, and over the long term, the team's eye for value and well-timed moves into credit have paid off handsomely, Anderson said.

Silver-rated  Parnassus Core Equity Investor  follows a socially conscious or environmental, social, governance mandate, but it also has distinct quality focus, says senior analyst David Kathman. Managers Todd Ahlsten and Ben Allen maintain a portfolio of roughly 40 stocks, at least 75% of which must be dividend-payers, with an emphasis on those having wide or increasing competitive advantages. The managers' quality bent is also what helped the fund keep a lid on losses in 2008, when it outperformed the S&P 500 and the large-blend Morningstar Category by more than 14 percentage points. And the fund has been a superior long-term performer: Since Ahlsten began managing it in May 2001, its returns have been among the best in the category and have trounced the S&P 500. These returns have been remarkably steady, beating the category in eight of the past 10 calendar years with much less volatility than the typical large-blend fund, Kathman said.

 Hartford International Opportunities  earns a Bronze rating. The fund is subadvised by an experienced team from Wellington, which downplays earnings reports in favor of evaluating the fundamental traits of companies, says senior analyst Gregg Wolper. It focuses in particular on return on capital and whether lagging companies have a catalyst that can improve their performance or successful companies can sustain their performance by having processes or patents that rivals can't duplicate, Wolper said. These traits have led to strong results when measured either by total returns or on a risk-adjusted basis, and the fund's fees are below average compared with peers'.

Professionally Managed Account
Lastly, donors with account balances of more than $250,000 can select an independent investment advisor to actively manage a customized investment portfolio (subject to Schwab Charitable investment policies and oversight, per the Schwab Charitable website). The portfolio may comprise individual stocks, mutual funds, exchange-traded funds, and fixed-income products. Schwab also states that independent investment advisors for the "largest accounts" may recommend allocations to alternative investments such as hedge funds, private equity/venture funds, real estate funds, and real asset funds.

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Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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