Foundation Investment Returns Surged by 15% Last Year, Study Says

Investment gains at private foundations in 2017 increased by more than double the rate of the previous year, scoring their highest rate of return since 2013.

Private foundations notched gains of 15 percent, up from 6.4 percent in 2016, according to a survey conducted by the Council on Foundations and the Commonfund Institute, an investing consulting group. Community grant makers saw returns of 15.1 percent, an increase over the 7.3 percent average gain they posted in 2016.

The climb may not continue, warned Deborah Spalding, Commonfund’s deputy chief investment officer. Strong corporate growth, she noted, was a reassuring sign. But rising interest rates, threats from trade wars, increasing nationalism across the globe, and high stock valuations in the public and private equity markets could put a crimp on endowment growth.

“Some of the easy, strong returns we’ve seen in the past may not be so easily repeated going forward,” she said. “We do think the market is likely to be, on margin, a bit more volatile than we’ve seen in the past.”

Managing Risk

The 2017 results showed that foundations continued to rebound from the poor showings of 2015, when investment returns for private foundations were flat and those of community foundations dropped 1.8 percent. But foundations might have been better off putting their assets in an index fund. The S&P 500 Index, for example, rose nearly 22 percent last year.

Spalding noted that grant makers typically invest in a range of investment vehicles to manage risk.

“Foundations are diversified portfolios, and are not designed to keep up with the U.S. equity market,” she said.

In 2017, asset allocations remained relatively unchanged. Private foundations invested 43 percent of their assets in alternative strategies, such as hedge funds; 24 percent in U.S. equities; 21 percent in non-U.S. equities; 9 percent in fixed-income investments; and 3 percent in short-term securities or cash.

The assets of community foundations were weighted more heavily to the U.S. public markets. These institutions invested 29 percent in U.S. equities; 27 percent in alternative strategies; 24 percent in non-U.S. equities; 14 percent in fixed-income investments; and 6 percent in short-term securities or cash.

Non-U.S. equities scored the highest rate of return: 26.4 percent for private foundations and 26.1 percent for community foundations.

Unclear Tax Law Effects

Reflecting the healthy market, more community foundations reported an increase in donations. Nearly half said gifts increased in 2017, up from 34 percent in 2016. The study noted that gifts to nonprofits may fall this year as a result of the tax overhaul that was signed into law in December 2017. Many nonprofit experts expect that the new rules will reduce financial incentives for giving.

Private foundations are required to direct 5 percent of their assets each year for charitable purposes. Last year, foundations in the survey reported paying out 5.7 percent of their endowment, down from 5.8 percent in 2016.

Over the past 10 years, the returns on private foundation assets have averaged 5.5 percent. That’s not strong enough for a foundation to meet the federally-mandated 5 percent payout requirement without losing ground to inflation in its endowment, according to Spalding.

The survey found a “notable increase” in foundations that screen their investments, using environmental or social criteria to distribute their assets, Spalding said. It’s difficult to track returns on such investments, she noted, because grant makers often use different definitions to characterize the guidelines.

The results came from a survey of 143 private foundations and 81 community foundations of various asset classes, ranging from under $100 million to above $500 million.

Correction: The Council on Foundations and Commonfund have recalculated their numbers on endowment returns for private foundations from 26.1 percent to 26.4 percent and for community foundations from 25.7 percent to 26.1 percent. The article has been updated to reflect those revised numbers.