July 14, 2017 | Read Time: 4 minutes
After a lackluster 2015, foundations’ investment portfolios saw solid growth in 2016, according to a new report. Still, with a decade of market volatility and average 10-year returns under 5 percent, some grant makers may struggle to hit payout requirements without eroding financial holdings.
Private foundations reported an average return of 6.4 percent in 2016, according to the Council on Foundations-Commonfund annual study of foundations’ investment performance. Community foundations, which tend to invest heavily in U.S.-based equities, did better, with an average return of 7.3 percent.
In 2015, private foundations had an average return of zero percent, while community foundations reported a minus 1.8 percent return. In 2014, the average returns were 6.1 percent and 4.8 percent, respectively.
Spending rates in 2016 at private foundations climbed to 5.8 percent, up from 5.4 percent the year before, according to the study. At community foundations, the spending rate inched downward 0.1 percent to 4.7 percent.
“Thank God for 2016, particularly when we compare it to 2015,” Mark Anson, chief investment officer at Commonfund, which manages institutional investments, said on a conference call with reporters Thursday. He described 2016 as an unpredictable year.
“If at the beginning of 2016, you were to buy a lottery ticket and that lottery ticket bet on Brexit, the Chicago Cubs, and Donald Trump, you would be able to retire at this point a gazillionaire,” Mr. Anson said.
U.S. equities assets performed the best for foundations in 2016, with particularly strong gains in the last two months of the year following the election of President Trump. Mr. Anson and others who manage or monitor foundations’ investments noted that economists predict a low-return environment, with lots of uncertainty, for the foreseeable future.
“I wish my crystal ball came in high definition. Unfortunately, it does not,” Mr. Anson said. “It is just as cloudy and opaque as everyone else’s.”
The new study included 203 foundations with combined assets of $96.3 billion. It is the fifth year that the Council on Foundations and the Commonfund Institute, the research arm of the investment firm, have produced the report.
Lowering Expectations
The relatively strong returns in 2016 will do little to ease anxiety among foundation leaders and their investment teams. That’s because average 10-year returns for private foundations were 4.7 percent, while for community foundations they were 4.6 percent.
Sherry Magill, chief executive of the Jessie Ball duPont Fund, called it a “daunting environment.”
“We are pleased with the 2016 rebounding; 2015 was a sobering year for us as a sector, and particularly following the 2008 collapse. I think we’re in difficult territory, and how we manage these assets is critically important.”
Private foundations with assets of at least $500 million have lowered their long-term investment objectives. It was an average of 6.9 percent in 2016, down from 7.7 percent in 2015. At community foundations of a similar size, long-term investment objectives held steady at 7.1 percent.
Scrutinizing Fees
As some foundations lower their expectations for long-term returns, executives like Ms. Magill and her colleagues are ratcheting up their scrutiny of the fees they pay for alternative investments such as hedge funds, real estate, commodities, and derivatives contracts. U.S. equities outperformed alternative investment strategies for private foundations in 2016 with average returns of 11.8 percent and 5.6 percent, respectively.
“If you’re not getting a better return, let’s say, out of those instruments then you are out of indexed equities, over time that raises other questions about fees,” Ms. Magill said. “I think it is just a given.”
Ms. Magill said that the effects of the 2008 recession are still being felt at the duPont Fund. Jacksonville, Fla., where it is located, saw unemployment top 12 percent, while local foreclosure rates were some of the highest in the country.
“We have about $26 million in past overpayments because following the 2008 collapse, we overspent on purpose and by design to shore up in places like Jacksonville — our homeless-shelter system, our feeding programs,” Ms. Magill said.
In the wake of the economic collapse, the grant maker developed a program-related investment strategy to do things like put capital into the production of affordable rental housing. She expects to see more private foundations do the same.
If foundations face a low-return environment anyway, then making direct investments in products people need could prove a better use of the money, she said.
“That conversation around PRIs and MRIs, I think, is related to this larger conversation around traditional investing, alternative investing, and what it costs you to do that,” Ms. Magill said. “It is a really interesting, complex set of factors that I think roll up into what is our charitable purpose and how do we meet that and how do we preserve capital over time, and how do we invest that capital in different ways?”
