ELF
Capital Management, LLC
(Endowment
Like Fund Management)
December 2, 2005
This is the ELF Capital Management, LLC Market Letter
for the month of December 2005. If
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Is it the
winter holiday season, or is it me? Last
month’s newsletter about philanthropy and the use of charitable remainder
trusts was quite popular with my readers.
And, I’m not the only one writing about this topic. In fact, the November 28th issue
of Barron’s featured the growing interest in philanthropy since the beginning
of this decade.
According
to Barron’s: “When it comes to giving,
the rich are increasingly like Frank Sinatra:
They want to do it their way.
They want to give their money to their causes on their
schedules. And they want to make sure
the legacy lives on. That’s why they’re
rushing to set up their very own foundations.”
Over the
past several months, I have been participating in a leadership program
coordinated through my local chamber of commerce. The purpose of the program is to help our
Greater Charlottesville community meet its need for active participation of
informed and dedicated leaders. Its primary
objective was to have us study challenges and issues of concern facing our
community. Most of those challenges we
studied involved issues of health, education and welfare. Or, to put it more clearly, issues of health,
education and welfare seemed to be the best solutions to improve and maintain
the well being of the community. The
challenges, however, seemed more a lack of adequate funding.
Early in
our nation’s history, churches initiated the practice of promoting public
good. They used their resources to found
and operate schools, hospitals and homes for orphans. During the late 1800’s, wealthy families
began to supplement religious philanthropy by establishing charitable trusts benefiting
specific purposes. This worked quite well
up until the Great Depression. When the
depression hit, religious and private philanthropic resources were crippled in
the face of overwhelming need. This
prompted government to step in and they have remained in the business of social
welfare ever since.
Yet, don’t
governmental programs more often resemble a band-aid than a cure?
As readers of my newsletters well know, wealth management is
the ultimate goal of all that we do at ELF Capital Management.
Yes, we promote our services; yet, you will find that we
always seek to present thought provoking topics that are relevant to our wide
audience.
This
month’s newsletter will discuss how private foundations serve venture
capitalism at its best and a brief introduction to the climate in which they operate. And, whether you find this topic of interest,
or not, make sure you look over our
review of the economic and investing climate for the month past, the current
market outlook and our investment performance.
Our investors had a very rewarding month and we won some honors!
Benefits of Private Foundations
Private
foundations are nongovernmental, nonprofit organizations organized and supported
by an individual, a group of individuals, a family or a company. In contrast to a public charity, they typically
have a single major source of funding (usually in the form of gifts from one
family or corporation rather than funding from many sources) and most have as
their primary activity the making of grants to other charitable organizations
and to individuals.
It is the social, personal and
financial benefits that make private foundations very special investments in
the future. Unlike a direct gift, which
usually benefits one recipient once, a private foundation perpetuates the
donor’s generosity for so long as it exists.
Affecting
human welfare, private foundations play a vital role in supporting social,
scientific and cultural innovation. Whether
you wish to change the course of things or invest your energy and skill in
alleviating suffering or advancing knowledge, a private foundation can help
accomplish those purposes. In this
setting, philanthropy borrows some of the best practices of the venture capital
world to invest in charitable ideas to build their capacity effectively. A venture philanthropist values their dollars
in terms of the social return on investment.
The kind of new ideas most needed by society changes over time, and a
private foundation can respond to new needs as they occur.
In addition, several important
personal benefits accrue to donors who establish private foundations. Many donors utilize private foundations as
enduring tributes to loved ones – memorials that are not static monuments but
living, changing entities. As well, some
find that setting up a foundation is an effective means for organizing their
charitable efforts and for regularizing the amount given. A foundation is also an orderly mechanism for
giving that intervenes between the donor and potential recipients. In the case of a family foundation, most
donors have found the foundation to be a stimulating and effective vehicle for
teaching the next generation about philanthropy and its value to the family. In those family situations, the foundation
also becomes a rallying place, an opportunity to share values and concerns for
society, and a common cause for family members who might be scattered
geographically.
Because a private foundation is a
charitable organization, financial benefits accrue as a result of its federal
income tax exempt status – although certain types must pay a 2 percent excise
tax on its net investment income.
Regardless, the gifts you make to establish a new foundation or grow an
existing one can afford you certain tax advantages; income, gift and estate tax
deductions are available under the law.
Types of Private Foundations
Every
organization that qualifies for exemption under the U.S. IRS Code section
501(c)(3) is a private foundation unless it is considered a public charity. Generally, organizations that are classified
as public charities are those that (i) are churches, hospitals, qualified
medical research organizations affiliated with hospitals, schools, colleges and
universities, (ii) have an active program of fundraising and receive
contributions from many sources, including the general public, governmental
agencies, corporations, private foundations or other public charities, (iii)
receive income from the conduct of activities in furtherance of the
organization’s exempt purposes, or (iv) actively function in a supporting
relationship to one or more existing public charities.
Under the
tax laws, private foundations are distinguished as either operating foundations
or grant-making foundations. Yet,
private foundations can differ greatly in design and purpose. The major types of private foundations are
discussed below.
Corporate Foundation: A corporate (company-sponsored)
foundation is a private foundation that derives its grant-making funds
primarily from the contributions of a profit-making business. This type of foundation often maintains close
ties with the donor company, but it is a separate, legal organization,
sometimes with its own endowment. More
often than not, these are pass-through foundations.
Pass-Through Foundation: The pass-through foundation is a
private grant-making organization that distributes all of the contributions it
receives each year. The pass-through
election may be made or revoked on a year-to-year basis.
Corporate Giving Program: A corporate giving (direct giving)
program is a grant-making program established and administered within a
profit-making company. Gifts or grants
go directly to charitable organizations from the corporation. Corporate giving programs do not have a
separate endowment; their expense is planned as part of the company's annual
budgeting process and usually is funded with pre-tax income.
Family Foundation: Approximately two-thirds of the
estimated 44,000 private foundations in this country are believed to be family
managed and most are of the grant-making kind. The Council on Foundations defines a family
foundation as a foundation whose funds are derived from members of a single
family. Ordinarily, at least one family
member serves as an officer or board member and relatives may play a
significant role in governing or managing the foundation throughout its life. Most family foundations are run by family
members who serve as trustees or directors on a voluntary basis, receiving no
compensation. And, most family
foundations concentrate their giving locally, in their communities.
Grant-making Foundation: These private foundations are also
known as "non-operating" because they do not run their own programs. The primary purpose, as you might guess, is
to make grants. This type of foundation
must distribute for charitable purposes approximately 5% of the market value of
their assets each year. And, although
exempt from federal income tax, they must also pay an excise tax of 2% of their
net investment income each year.
Independent Foundation: An individual usually founds these
private foundations, often by bequest. Sometimes
individuals or groups of people, such as family members, form a foundation
while the donors are still living. Many
large independent foundations, such as the Ford Foundation, are no longer
governed by members of the original donor's family but are run by boards made
up of community, business and academic leaders. The John D. and Catherine T. MacArthur Foundation
is another example of a well-known "independent" private foundation.
Operating Foundation: Also called private operating
foundations, are not primarily, grant-making organizations. They operate facilities or institutions
devoted to a specific charitable activity.
Some conduct research while others provide a direct service by operating
museums, handicapped facilities or historical sites, to name a few. The Carnegie Endowment for International
Peace and the Getty Trust are examples of operating foundations.
Stand-by
Foundations: These are private
foundations created during a donor’s lifetime with a minimum or modest
endowment. The concept here is that the
bulk of its future endowment is planned to be received upon the death of its
founding benefactor. This gives the
donor the ability to organize, train and develop the foundation’s directors,
trustees and / or managers before large sums are involved.
Concluding
Thoughts
As you
might have guessed by now, establishing a private foundation is akin to running
a business. In fact, there are
significant administrative, legal and financial considerations to
consider. Yet, like any business, it
takes consistency and focused effort to make an impact and build success.
Not
everyone should consider establishing a private foundation. Yet, there are far more needs in our country
than will ever be met. Therefore, if you
have the capability to establish or support a private foundation, and the
desire to do good, I know of no better way to have impact not only on your own
time and place, but on the future as well.
ELF Capital Management Investment Performance Update
Did you
ever see Martin Scorsese’s 1980 black-and-white film biography of boxer Jake
Lamotta? LaMotta, as portrayed by Robert
De Niro – one of my favorite actors, was a man tormented by his temper and
jealousy. But in the boxing ring, his
greatest athletic talent was his ability to withstand punishment. When I think of how resilient our
Equity
markets finished November on a positive note.
Oil and gasoline prices have fallen significantly this month and,
although higher than last year, consumers appear happy and continue to
spend. December is expected to be a
positive month for equity markets also – so long as we continue to receive
positive economic reports.
Longer
term, the world economy is expected to enjoy continued growth – in the 3% range
– in both 2006 and 2007. And, as has
been the case for the past two years, continued
Given the
strength of the economy and increasing concerns about inflation, many
economists believe the Fed will continue to raise interest rates to 5% or more
- at a continued measured pace – before taking a break. If history serves as an indicator, this would
have negative implications for continued momentum. Also, with household debt at record highs,
how long will it be before
For the month ended November 30, 2005, our one-month performance is up 2.76%,
our three-month return is up 3.83% and our one-year return is up 7.37%.
Two of
our own recently received some honors:
Virginia Business Magazine recognized Paul D. Hoffman, in corporate
taxation, and Henry V. Kaelber, in personal financial planning, as Super CPAs
for 2005. Also, Consumers Research
Council of America, a
For
disclosure purposes, past performance is not necessarily indicative of future
results and ELF Capital Management LLC (ELF), formerly Hoffman White &
Kaelber Financial Services LLC, cannot guarantee the success of its
services. There is a chance that investments
managed by ELF may lose a substantial amount of their initial value.
ELF is an
independent discretionary investment management firm established in February
2003. ELF manages a strategic allocation
of primarily exchange-traded index funds (ETFs), and may invest in other
carefully selected securities. ELF may
also employ hedging techniques, through the use of short positions and
options. ELF manages individual portfolio
accounts for both individual and business clients.
The ELF ETF
Strategy returns presented herein represents a composite of actual results from
all client portfolios managed by ELF.
Currently, it is the only composite presented by ELF and separate client
account portfolio positions are substantially similar, except as may be modified
for retirement plan accounts and accounts with net equity of $60,000 or
less. There is no minimum account size
for inclusion into ELF’s ETF Strategy composite and accounts with net equity of
$60,000 or less have a tendency to downwardly skew the combined results.
The
performance data presented herein includes the reinvestment of dividends and
capital gains; as well, ELF’s ETF Strategy composite returns are presented after
deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee
as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on
the next $4,000,000; and, 0.75% thereafter.