Mutual fund allots portion of fee to charity

Maybe this will make fund fees easier to bear.

The Davlin Philanthropic Fund, which was launched in July, will donate one-half percentage point of its 1.65% expense ratio to charities picked by its investors.

“Instead of paying the fees to the portfolio manager, you are giving it to your favorite charity,” said William Davlin, president of Davlin Fund Advisors and the Davlin Foundation of Wayland, Mass. “You get the full benefit of the donation. Your taxable income is reduced by the amount of the donation. The investor gets the return. The charities get a very dependable year-in and year-out cash flow.”

The $1.8 million fund invests mainly in value companies across all market capitalizations.

When assets grow to about $50 million, the amount of annual donations — as a percentage of the fund’s assets — will start to increase, added Mr. Davlin, who served as chief financial officer and director of Burst Media Corp., an Internet advertising sales company in Burlington, Mass., from 1996 to 2007. Earlier, he worked as a research analyst at Royce & Associates LLC in New York.

Donations are made to the non-profit Davlin Foundation, which distributes them to the investor’s designated charity. The minimum investment is $2,500 ($1,500 for an IRA) and there is a 1% fee imposed if shares are redeemed in the first year.

While some socially conscious funds make donations to charity, donating a portion of a fund’s management fee is unique, said David Kathman, an analyst at Morningstar Inc. of Chicago.

“It sounds like they are combining the grant-making ability of a donor-advised fund with the mind-set of a person inclined to buy a no-load mutual fund,” said Yale Levey, managing director at Next Generation Wealth Planning LLC of Roseland, N.J., which manages $65 million in assets.

Mr. Levey is also a board member of the International Association of Advisors in Philanthropy of Rocky Hill, Conn.

“It will be interesting to see how they do,” he said.

Whatever the fund’s philanthropic mission, its success hinges on its ability to outperform.

“Investors are fickle,” said Barry Glassman, senior vice president of Cassaday & Co. Inc. of McLean, Va., which manages $340 million in assets. “While philanthropy is important to many investors, their risk-adjusted performance will have the greatest impact. Studies have shown that when a fund has done really well, it has inflows. If it performs poorly, there are outflows.”

Some advisers are skeptical.

“It sounds like the mutual fund industry is coming up with a marketing idea,” said Andrew Orr, principal and founder of OrrGroup LLC of Tampa, Fla., which manages $25 million in assets. “You have to be skeptical by nature when new things come out from Wall Street or the mutual fund industry because it’s very market-driven.”

Investors can always buy a cheaper mutual fund and then decide about a donation, Mr. Orr said.

“On the face of it, it sounds very good and good for charity,” he said. “But you could pay a lot less with a lot of other companies with a lot of track record and the investor could make a larger difference.”

Of course, Mr. Davlin disagrees.

“I think they are missing the point,” he said. “You are paying the fee anyhow. Only why pay it to your portfolio manager when you can pay it to your favorite charity? One hundred percent of the profits and one-third of the fee we are giving to charity.”

Mr. Davlin is willing to concede, however, that investors have cheaper alternatives.

“We are about average and you could also find funds that are higher,” he said. “The problem with that idea is that you are saying to yourself, ‘I saved 20 basis points and I’m going to donate it to charity this year.’ The No. 1 hurdle to doing that is the psychological hurdle of sitting down and writing the check. This product works the way we live. It’s automatic. It’s about sustainable giving.”

E-mail Sue Asci at [email protected].