Buffett’s 2018 Letter / Fees Matter When Investing “Forever” / Clear Your Calendar for April 11th

In the Oracle of Omaha’s 54th annual letter to Berkshire Hathaway shareholders, Warren Buffett celebrates the dynamism of the American economy while cautioning investors against high-cost advisory fee arrangements.

Gabriel-Hament-Investment-Advisor

Buffett attributes the success of the United States to the American tailwind – a force animated by patriotism, sacrifice, and the belief that “generations beyond would live far better lives than they themselves had led.”[1] The discipline of prior generations who spent less than they earned, investing their hard-earned savings, drove productivity gains and raised living standards. Just like America’s, Berkshire’s geometric growth, Buffett says, can be attributed to the accumulation and reinvestment of the holding company’s “savings,” or as corporate managers would call them, retained earnings.

Here’s Buffett:

“In 1788 – to go back to our starting point – there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.

“Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled ‘savings.’ And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.”

Buffett recalls how on March 11, 1942, at age 11, with battlefronts opened wide in the European and Pacific theaters, he traded his “life savings” of $114.75 for three shares of Cities Service preferred stock. How much would the $114.75 be worth today, if the proceeds generated from young Buffett’s lawn-mowing/snow-shoveling/golf ball-collecting and resale operation had been placed in a no-cost index fund tracking the S&P 500, with dividends reinvested?

Answer:

“If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

“Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various ‘helpers,’ such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”

These figures are a wake-up call for investment committees overseeing perpetual funds of nonprofit institutions, small and large. The Sarasota-Manatee region is home to three community foundations, a half dozen private foundations, several higher education institutions and dozens of independent nonprofits with endowed funds. We will exclude the few hundred million sitting in the reserve accounts of local municipalities, as state statute restricts investment options to short-term, high-grade, fixed-income instruments. By our calculations, in the two-county area there is well over $1 billion in charitable dollars invested in some form of traditional endowment model, an investment approach that tends to lean heavily on “exotic,” generally illiquid alternatives (hedge funds, private equity, and real assets), with the balance invested in more familiar global marketable equity and debt securities. Frequently this investment mix is developed and overseen by a consultant, who selects and monitors a stable of underlying managers. Two layers of fees – consultant and manager – are now added to brokerage and custody costs. Now, if this “outsourced chief investment officer” (OCIO) model were “working,” the alpha generated from the underlying managers and the skill of the OCIO in setting asset class exposure targets and selecting top-performing managers would, over time, surmount the added fee layers and produce returns that, at minimum, meet a benchmark.

However, a recent study authored by Professors Sandeep Dahiya of Georgetown University’s McDonough School of Business and David Yermack of New York University’s Stern School of Business analyzed the returns of 28,296 nonprofit endowments from 2009–2016. They found the median return for the 8-year period across 28,000+ organizations to be 3.75%, while a 60% domestic equity/40% Treasury bond construction delivered 9.28%.[2] After a decade of lagging results nationwide, it is time for a sea change in how monies designated for perpetual charitable support are invested.

With $1 billion in philanthropic dollars managed in a framework similar to that of the thousands of endowments surveyed by Dahiya and Yermack, we are giving up $50 million of local charitable support annually. Over 20,000 children in Sarasota County schools rely on a free or reduced lunch.[3] That is 20,000 families who need every potential charitable dollar brought to bear on summer nutrition programs, help with housing, basic medical care, and job training.

On April 11th, we will elevate this conversation around health, hunger, and philanthropy. National and local authorities are convening for our third annual Financial Literacy Day at the USF Sarasota-Manatee campus. Dr. Judith Monroe, President and CEO of the Center for Disease Control Foundation; Lisa Marsh Ryerson, President of the AARP Foundation; and Erin McLeod, President and CEO of the Friendship Centers, will lead a panel discussion. A dozen other nationally recognized speakers will discuss topics related to global financial markets, the trade war, and Federal Reserve policy. Please call 800-257-7013 or visit http://sar.usfsm.edu/event/financial-markets-and-the-economy/ to confirm your attendance and participation. Cost is just $50 to cover a light breakfast and catered lunch.

Gabriel Hament
Investment Advisor Representative: Foundations, Charitable Accounts & Private Individuals
Email | Bio


[1] http://www.berkshirehathaway.com/letters/letters.html
[2] https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3291117
[3] https://www.heraldtribune.com/news/20181019/lunch-means-more-for-some-in-sarasota-county-schools


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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What are the Do’s and Don’ts of New Year’s resolution-making?

Excerpt from What are the Do’s and Don’ts of New Year’s resolution-making?
12/19/2018

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There are two components to New Year’s resolution-making:

(1) The development of meaningful and attainable goals.

(2) Tracking progress toward reaching these goals.

– Do identify 1-2 goals associated with each “category” of your life, e.g. professional development, fitness and nutrition, financial. Don’t haphazardly identify and list a dozen goals without any organizational structure.

– Do set a weekly self-check-up appointment on your calendar to track progress of your 2019 resolutions. Don’t hope “things will come together” after setting your 2019 goals. Periodic assessment of progress will ensure accountability.

Do you have any tips for people with financial resolutions?

Spending less than you earn and investing prudently are the cornerstones of financial freedom and stability. Skip Starbucks and enjoy your morning coffee at home. The compounding of these weekly savings over 20-30 years could add tens of thousands of dollars to your nest egg!

Read the full article at Wallet Hub’s website: www.wallethub.com

Gabriel Hament is investment advisor representative to foundations and charitable accounts. Hament works closely with the management teams and boards of directors of nonprofit institutions to design investment allocations in alignment with organizations’ mission and unique objectives. He is a native of Sarasota and serves as a member of the Sarasota County School District’s Financial Advisory Committee, monitoring the District’s investment accounts ($50 million core portfolio).


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Donor-advised funds: Donation warehouses or a democratic vehicle for philanthropy?

Excerpt of “Donor-advised funds: Donation warehouses or a democratic vehicle for philanthropy?” by Gabriel Hament
Source: Sarasota Herald Tribune
11/26/2018

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The long-standing debate surrounding the lightly regulated world of donor-advised funds has been gaining traction on the pages of the Nonprofit Quarterly.

For those unfamiliar with them, donor-advised funds are a philanthropic vehicle housed at a public charity in which a private or corporate donor can make an irrevocable gift of cash, appreciated securities or hard assets like real estate and receive an immediate tax benefit.

The donor directs the funds’ sponsor, frequently a community foundation, to make grants from the fund to individual nonprofits. DAF assets can be invested and grow tax-free. Some donor advised funds are structured to disburse their money over a finite period of time, while others are designed to last indefinitely.

To help frame the discussion, some bullet points originally published by the Denver Post from Bruce DeBoskey of the DeBoskey Group consultancy on the history and growth of donor-advised funds are available at the link below.

After reading, we ask our readers: Is the goal of a donor-advised fund to provide perpetual support for charitable initiatives or is it a temporary pass-through vehicle that is to be spent down to zero, sooner rather than later?

Read the full article at the Sarasota Herald’s website: www.heraldtribune.com

Gabriel Hament is investment advisor representative to foundations and charitable accounts. Hament works closely with the management teams and boards of directors of nonprofit institutions to design investment allocations in alignment with organizations’ mission and unique objectives. He is a native of Sarasota and serves as a member of the Sarasota County School District’s Financial Advisory Committee, monitoring the District’s investment accounts ($50 million core portfolio). Contact him at feedback@cumber.com or (941) 926-6279.


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Donor-Advised Funds (DAFs): Warehouses of Charitable Dollars or a Democratic Vehicle for Philanthropy?

The long-standing debate surrounding the lightly regulated world of donor-advised funds has been gaining traction on the pages of the Nonprofit Quarterly (NPQ).[1]

Gabriel Hament, Foundations and Charitable Accounts, Cumberland Advisors

To help frame the discussion, here are some bullet points from Bruce DeBoskey on the history and growth of DAFs, published by the Denver Post:

(*) “Today, there are about 300,000 DAFs in the United States, holding nearly $100 billion.”[2]

(*) “Often, DAFs are associated with financial investment firms, such as Fidelity Charitable or Schwab Charitable, or with independent entities like the National Philanthropic Trust or the American Endowment Foundation. DAFs are also housed at more than 700 community foundations, such as The Denver FoundationRose Community Foundation, and Community First Foundation.”[3]

(*) “Most DAFs report that from 16 to 20 percent of donated assets go out to charity each year. This is much higher than the five percent required-payout for private foundations.”

(*) “The major DAFs report that from 80 to 84 percent of their assets are paid out to charities over a ten-year period, leaving 16 to 20 percent of their contributions sitting dormant. An IRS study found that nearly 22 percent of DAF sponsors in 2012 made zero distributions.”[4]

The criticism leveled at the DAF vehicle centers around two contentions:

(1) The absence of any state or federally mandated rule compelling DAFs to distribute funds to “working charities” results in billions of dollars lying dormant while charitable needs go unmet.

(2) Financial firms that have established 501(c)3 arms in which their clients’ DAFs are housed, have little incentive to accelerate the distribution of monies from the DAFs because the firm likely collects an investment management fee for investing the funds.[5]

Ray Madoff, a professor at Boston College Law School, suggests some policies that may encourage a faster flow of funds from DAFs to charitable initiatives:

(1) “Congress could incentivize distributions from DAFs by tying some of the charitable tax benefits to the release of DAF funds. For example, Congress could enact rules that would allow donors to avoid capital gains on transfers of property into DAFs, but would delay the charitable deduction until such time as funds are distributed from the DAF to non-DAF beneficiaries.”[6]

(2) “Alternatively, Congress could impose a maximum time period for DAF accounts to be distributed outright to charities. This could easily be accomplished by requiring donors, as a condition of the deduction, to name a non-DAF charity that would receive any undistributed funds at the end of the designated period.11 For example, if Congress were to impose a maximum time period of ten years, then a donor who funds a DAF in 2018 would be required to name a charity that would receive any remaining funds in the 2018 DAF account by 2028.12 DAFs would maintain their flexibility, because donors could change their charitable designations by simply making distributions from that account before the termination date. A maximum distribution period would not undermine the effectiveness of DAFs or their appeal to donors. It would simply establish a limit that would ensure that tax-benefited dollars are granted outright to nonprofits within a reasonable period of time.”[7]

We will add another wrinkle to this conversation, and that is the consideration of intergenerational equity – a foundational principle governing the management of funds established for the perpetual benefit of nonprofit organizations. Nearly every jurisdiction in the United States has adopted the Uniform Management of Institutional Funds Act (UPMIFA), which mandates that fiduciaries of perpetual funds balance the needs of the present and the future. Please see our previous writings on this topic. (Here: http://www.cumber.com/intergenerational-equity/ and here: http://www.cumber.com/the-imprudent-man-rule/.)

We will conclude with a question to our readers: Is the goal of a donor-advised fund to provide perpetual support for charitable initiatives, or is it a temporary pass-through vehicle that is to be spent down to zero, sooner rather than later?

We look forward to your feedback.

Gabriel Hament
Foundations and Charitable Accounts
Email | Bio


[1] NPQ launched as a national print journal in the winter of 1999, with the mission to provide credible, research-based articles for nonprofits about management and governance. The editorial mission evolved to cover issues related to the operating environment for nonprofits – specifically, public policy and philanthropy. https://nonprofitquarterly.org/about-us/
[5] Read more about for-profit financial institution donor-advised funds (FIDAFs) here: https://nonprofitquarterly.org/2018/07/25/daf-reform-a-chance-to-provide-a-real-benefit-to-working-charities/

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.