Millie Capital Management LLC
Millie Capital Management Portfolio Management • Financial Counsel
2333 San Ramon Valley Boulevard • Suite 160 • San Ramon • California 94583 • (925) 820-0900 www.milliecapital.com
QUARTERLY COMMENTARY January, 2016
HOW TO GIVE
Three prominent goals for most wealth management clients are: saving for retirement, family wealth transfer, and philanthropy. For the philanthropy goal, we present some useful tools in this issue. We work with clients to determine the most efficient way to give (donate cash or assets that have appreciated), whether to use a Donor-Advised Fund, and to examine the target charities themselves. To illustrate the latter, we will show contrasting profiles of two charities: the Wounded Warrior Project and Doctors Without Borders. Efficient Giving Uncle Sam favors generous taxpayers. Your gift to a qualifying charity saves income tax expense. The general rules: a. Use cash, for deductions up to 50% of adjusted gross income (AGI) in a calendar year. b. Use long term capital gain property (held for more than one year) for deductions up to 30% of AGI.
c. Gift deductions beyond these percentage limits carry over, up to five future tax years. If you desire to use securities, it is important to select those that might be ready to be sold anyway, on investment merits. The donation not only gives you a tax deduction measured by current market value, but avoids selling the asset and triggering a capital gain tax. We have observed that portfolios built with individual stocks, versus a shorter list of mutual funds, can lead to higher gains in some of the stocks than in mutual funds (due to internal diversification in most funds). Highly appreciated, long-held stock positions can be the most powerful tool of philanthropy. Donor-Advised Fund A donor-advised fund (DAF) acts as a pass through vehicle for donations, usually over many years. For an annual fee, the fund will accept a deductible donation in the first year, invest your donated assets, and allow you to name specific grants in future years. This can be a good strategy if the donor expects to have a large AGI in one year, but wants to take several years in selecting
charities. Income tax on the large AGI can be managed lower via a large transfer to the DAF in the same year. The donor may continue to donate to the DAF in future years, if desired.
A Snapshot of Two Charities
It is important to evaluate the investment track record of a DAF, as it may be holding your donated assets for many years. If you would prefer that your investment advisor continue to manage these assets after they are donated, certain organizations will permit this. We prefer to use a DAF called American Endowment Foundation, due to its low costs and ability to custody and manage donated assets on the T.D. Ameritrade platform. Charity Review Report Virtually all charitable donations are wellintentioned. This does not mean that they are all equally effective. Careful philanthropy requires some work to determine how much of the donation actually reaches the intended charity beneficiary group. This is because some percentage of each donated dollar will be consumed in “non-program expenses” such as fundraising advertisements, office rent, and administrative staff.
Doctors without Borders analysis of overhead
Charities are typically IRS 501c(3) corporations, and file IRS Form 990 each year. Our review of recent Form 990 filings will reveal how much was raised each year, and of that how much was consumed in non-program expense. It reveals other key information such as the policy on loans to related parties and the annual salary of the executive director. Since some charities are more financially efficient than others, our Charity Review Report can also list other charities with similar programs, that could be more efficient. The following pie charts illustrate why Doctors without Borders is more efficient than the Wounded Warrior Project. The nonblue areas of the pies show the drag of fundraising and administrative overhead.
Wounded Warriors analysis of overhead
Why does Wounded Warrior Project have over 40% of total contributions not directly benefitting wounded veterans? The following table shows that it spent $84 million for fundraising. Much of that was for TV ads.
The Charity Review Report may also include a checklist of good business practices. Here are several important items, for which the desired answer is “yes.” The answers and the expense ratios are summarized in a total score. Independent voting board members? No material diversion of assets? Audited financial statements available? No loans to or from related parties? Policies on conflict of interest, whistleblowers, donor privacy? Process exists for determining CEO and director compensation? Clients may not be satisfied with the report on their intended charity. What next? Fortunately, resources exist to expand the list of available charities in a given category. For example, a client who was considering the Wounded Warriors Project might turn attention to one of the following charities in that category, and then compare their total scores: Special Operations Warrior Foundation USO of Missouri
This charity paid its Executive Director Steven Nardizzi $473,000 in 2014, according to the IRS. Nice work, if you can get it. Large, well-known charities may be much less efficient in their raising and spending of contributions than regional and local charities. Wounded Warriors raises over $300 million a year, whereas a local school district’s taxdeductible contributions might only reach $100,000 – if that. The community’s efforts to raise and spend that money might not involve any paid management or television advertising. Also, the donor’s impact on a small charity is typically much larger than is true for big, wellknown ones. But this may have its own price: multi-year dependency on the donor.
Navy-Marine Corps Relief Society Homes of our Troops Disabled Veterans Charitable Service Fisher House Foundation Wounded Warriors Family Support
Please call the office if the development of a list of alternative charities, or a financial review of one charity, is of interest. Together with your tax accountant, we can analyze whether cash, stock, or other long-term capital gain property maximizes your tax benefits for a donation, and strategize multi-year philanthropic planning. In these ways, you can match the right charity with the most efficient gifting plan.
INVESTMENT OUTLOOK FOR 2016
Savita Subramanian, of Bank of America Merrill Lynch
Each year at this time, Wall Street strategists issue their annual forecasts for the securities markets. Their career trajectories (not to speak of bragging rights) can be driven by the accuracy of these forecasts. For context, in the year ended December 2015, the major U.S. stock indexes were basically unchanged. Government and corporate bonds lost 1% and 2.4%, respectively, before accounting for their interest payments. Corporate profits in 2015 continued to rise, except for the energy sector. This year’s securities forecasts reflect the idea that the investors will react positively to the combination of the earnings progress of last year, plus more this year. See table for earnings growth by S&P sector. (For the energy and natural resources sectors, many strategists expect the profit slide in 2015-16 to turn around in 2017.) 2016 Estimated Earnings Growth 18.7% 4.5% -26.3% 9.4% 38.1% 4.9% 17.2% 6.2% 9.6% 3.5%
Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Utilities
Source: Bloomberg Compilation of Security Analysts
For U.S. equity prices in 2016, the analysts’ forecasts are clustered around +7.6%. In other words, they believe that the S&P 500 Index will rise from 2045 to 2200. This exact forecast was given by five prominent strategists, working for Merrill Lynch, Citibank, J.P. Morgan, Columbia Threadneedle, and Barclays Capital. Assuming that dividends continue to reward investors by another 2%, the total return will add up to 9.6% according to this forecast. Ten strategists were profiled in an annual outlook article in Barron’s magazine on December 14th. The most pessimistic strategist, David Kostin of Goldman Sachs, forecasts a 4.7% positive total return. The most optimistic, Stephen Auth of Federated Investors, forecasts a 24.7% total return this year. For bond investments, the 2016 total return will depend on whether the Federal Reserve continues to lift short-term interest rates from the new level of 0.38%. The ten strategists all forecast continued steady U.S. economic growth, which implies rising interest rates. A bond that is held to maturity will deliver a predictable total return, but in the years before maturity its market value will decline if interest rates rise. The following chart shows how a 1% rise in 10-year U.S. Treasury yields may impact prices of various kinds of bonds.
2333 San Ramon Valley Boulevard • Suite 160 • San Ramon • California 94583 • (925) 820-0900 www.milliecapital.com
QUARTERLY COMMENTARY January, 2016
HOW TO GIVE
Three prominent goals for most wealth management clients are: saving for retirement, family wealth transfer, and philanthropy. For the philanthropy goal, we present some useful tools in this issue. We work with clients to determine the most efficient way to give (donate cash or assets that have appreciated), whether to use a Donor-Advised Fund, and to examine the target charities themselves. To illustrate the latter, we will show contrasting profiles of two charities: the Wounded Warrior Project and Doctors Without Borders. Efficient Giving Uncle Sam favors generous taxpayers. Your gift to a qualifying charity saves income tax expense. The general rules: a. Use cash, for deductions up to 50% of adjusted gross income (AGI) in a calendar year. b. Use long term capital gain property (held for more than one year) for deductions up to 30% of AGI.
c. Gift deductions beyond these percentage limits carry over, up to five future tax years. If you desire to use securities, it is important to select those that might be ready to be sold anyway, on investment merits. The donation not only gives you a tax deduction measured by current market value, but avoids selling the asset and triggering a capital gain tax. We have observed that portfolios built with individual stocks, versus a shorter list of mutual funds, can lead to higher gains in some of the stocks than in mutual funds (due to internal diversification in most funds). Highly appreciated, long-held stock positions can be the most powerful tool of philanthropy. Donor-Advised Fund A donor-advised fund (DAF) acts as a pass through vehicle for donations, usually over many years. For an annual fee, the fund will accept a deductible donation in the first year, invest your donated assets, and allow you to name specific grants in future years. This can be a good strategy if the donor expects to have a large AGI in one year, but wants to take several years in selecting
charities. Income tax on the large AGI can be managed lower via a large transfer to the DAF in the same year. The donor may continue to donate to the DAF in future years, if desired.
A Snapshot of Two Charities
It is important to evaluate the investment track record of a DAF, as it may be holding your donated assets for many years. If you would prefer that your investment advisor continue to manage these assets after they are donated, certain organizations will permit this. We prefer to use a DAF called American Endowment Foundation, due to its low costs and ability to custody and manage donated assets on the T.D. Ameritrade platform. Charity Review Report Virtually all charitable donations are wellintentioned. This does not mean that they are all equally effective. Careful philanthropy requires some work to determine how much of the donation actually reaches the intended charity beneficiary group. This is because some percentage of each donated dollar will be consumed in “non-program expenses” such as fundraising advertisements, office rent, and administrative staff.
Doctors without Borders analysis of overhead
Charities are typically IRS 501c(3) corporations, and file IRS Form 990 each year. Our review of recent Form 990 filings will reveal how much was raised each year, and of that how much was consumed in non-program expense. It reveals other key information such as the policy on loans to related parties and the annual salary of the executive director. Since some charities are more financially efficient than others, our Charity Review Report can also list other charities with similar programs, that could be more efficient. The following pie charts illustrate why Doctors without Borders is more efficient than the Wounded Warrior Project. The nonblue areas of the pies show the drag of fundraising and administrative overhead.
Wounded Warriors analysis of overhead
Why does Wounded Warrior Project have over 40% of total contributions not directly benefitting wounded veterans? The following table shows that it spent $84 million for fundraising. Much of that was for TV ads.
The Charity Review Report may also include a checklist of good business practices. Here are several important items, for which the desired answer is “yes.” The answers and the expense ratios are summarized in a total score. Independent voting board members? No material diversion of assets? Audited financial statements available? No loans to or from related parties? Policies on conflict of interest, whistleblowers, donor privacy? Process exists for determining CEO and director compensation? Clients may not be satisfied with the report on their intended charity. What next? Fortunately, resources exist to expand the list of available charities in a given category. For example, a client who was considering the Wounded Warriors Project might turn attention to one of the following charities in that category, and then compare their total scores: Special Operations Warrior Foundation USO of Missouri
This charity paid its Executive Director Steven Nardizzi $473,000 in 2014, according to the IRS. Nice work, if you can get it. Large, well-known charities may be much less efficient in their raising and spending of contributions than regional and local charities. Wounded Warriors raises over $300 million a year, whereas a local school district’s taxdeductible contributions might only reach $100,000 – if that. The community’s efforts to raise and spend that money might not involve any paid management or television advertising. Also, the donor’s impact on a small charity is typically much larger than is true for big, wellknown ones. But this may have its own price: multi-year dependency on the donor.
Navy-Marine Corps Relief Society Homes of our Troops Disabled Veterans Charitable Service Fisher House Foundation Wounded Warriors Family Support
Please call the office if the development of a list of alternative charities, or a financial review of one charity, is of interest. Together with your tax accountant, we can analyze whether cash, stock, or other long-term capital gain property maximizes your tax benefits for a donation, and strategize multi-year philanthropic planning. In these ways, you can match the right charity with the most efficient gifting plan.
INVESTMENT OUTLOOK FOR 2016
Savita Subramanian, of Bank of America Merrill Lynch
Each year at this time, Wall Street strategists issue their annual forecasts for the securities markets. Their career trajectories (not to speak of bragging rights) can be driven by the accuracy of these forecasts. For context, in the year ended December 2015, the major U.S. stock indexes were basically unchanged. Government and corporate bonds lost 1% and 2.4%, respectively, before accounting for their interest payments. Corporate profits in 2015 continued to rise, except for the energy sector. This year’s securities forecasts reflect the idea that the investors will react positively to the combination of the earnings progress of last year, plus more this year. See table for earnings growth by S&P sector. (For the energy and natural resources sectors, many strategists expect the profit slide in 2015-16 to turn around in 2017.) 2016 Estimated Earnings Growth 18.7% 4.5% -26.3% 9.4% 38.1% 4.9% 17.2% 6.2% 9.6% 3.5%
Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Utilities
Source: Bloomberg Compilation of Security Analysts
For U.S. equity prices in 2016, the analysts’ forecasts are clustered around +7.6%. In other words, they believe that the S&P 500 Index will rise from 2045 to 2200. This exact forecast was given by five prominent strategists, working for Merrill Lynch, Citibank, J.P. Morgan, Columbia Threadneedle, and Barclays Capital. Assuming that dividends continue to reward investors by another 2%, the total return will add up to 9.6% according to this forecast. Ten strategists were profiled in an annual outlook article in Barron’s magazine on December 14th. The most pessimistic strategist, David Kostin of Goldman Sachs, forecasts a 4.7% positive total return. The most optimistic, Stephen Auth of Federated Investors, forecasts a 24.7% total return this year. For bond investments, the 2016 total return will depend on whether the Federal Reserve continues to lift short-term interest rates from the new level of 0.38%. The ten strategists all forecast continued steady U.S. economic growth, which implies rising interest rates. A bond that is held to maturity will deliver a predictable total return, but in the years before maturity its market value will decline if interest rates rise. The following chart shows how a 1% rise in 10-year U.S. Treasury yields may impact prices of various kinds of bonds.
