Foundation Investments Grew by Nearly 10% Last Year, Study Finds

Despite a slowing economy, American foundations reported an average annual return on investments of 9.9 percent for 2007, a rate that was down from the year before but higher than the average foundations had said they hoped to achieve, according to a report released last week by the Commonfund Institute.

In 2006, the country’s independent, private, and community foundations reported an average annual return of 13.7 percent, due in part to better market conditions then and the organizations’ increasing allocations to alternative investments.

John S. Griswold Jr., the institute’s executive director, said the volatility of the market had less effect on 2007 returns than expected, especially for foundations that used alternative investments and had diverse portfolios with varying levels of risk. “It was relatively benign, compared to where we’ve been the last four months,” Mr. Griswold said. “We have a number of economic issues that are weighing on people.”

Biggest Funds

Foundations with assets of more than $1-billion had the highest average return, 12.2 percent, while institutions with assets between $51-million and $100-million had the lowest, 9 percent.

Three hundred foundations with assets of more than $50-million — 226 independent or private foundations and 74 community foundations — provided information for the 2008 Commonfund Benchmarks Study. The Commonfund Institute is the educational and research arm of Commonfund, which manages approximately $40-billion in investments for 1,900 nonprofit institutions.

The return rates were higher than the average objective for foundations, which was 8.5 percent.

A 9.9-percent return should cover the average foundation’s spending, costs, and inflation and allow it to continue supporting its programs and missions, Mr. Griswold said. That ability to continue providing financial assistance to charities is especially important when states and local governments are cutting back on their support.

The average spending rate for foundations of all sizes remained constant for the third year in a row, at 5.5 percent.

Foundations may be in a period of more moderate returns and should be seeking strategies and investment managers that can capitalize on the market’s volatility, Mr. Griswold said. Long-term investment strategies and allocation of more resources to alternative investments, such as distressed debt and real estate, may also help foundations survive a market downturn and continue to show positive returns, he said.

“Diversification does pay off,” Mr. Griswold said. “There is no reason not to consider this a best practice.”

Survey results showed that among community foundations, a slight majority — 51 percent — reported increased donations to their endowments. Thirty-two percent of community foundations reported a decrease in private gifts. In 2006, 70 percent of community foundations reported increased donations to their endowments.

Kathryn Masterson is a staff reporter at The Chronicle of Higher Education.