Nonprofit Endowment Returns Still Sluggish in 2012, Survey Finds

Endowments at the nation’s charities and foundations are on pace for a second year in a row of lackluster investment returns in 2012, according to a new Chronicle survey.

The survey of 268 organizations that reported two years of data found that endowments recorded a median return on investment of 5 percent in 2011 and are seeing a similar rate of return this year, compared with a 12-percent gain in 2010.

The modest gains aren’t enough to recover the steep losses many nonprofits incurred during the depths of the recession. For the 181 groups that have reported five years of data, endowment values are 14.9 percent lower than in 2007 and 3 percent below 2008 levels, the recession’s first full year.

The losses are taking a toll on nonprofit leaders and board members.

“If you go from 2008 until now, it hasn’t been a very fun time to be on an investment committee” of a nonprofit board, said Ron Klotter, director of Midwest consulting at R.V. Kuhns & Associates, in Portland, Ore., which advises nonprofits. “It’s been incredibly volatile. Nothing you’ve done has worked. It has added to the fiduciary fatigue.”

Still, nonprofits are pressing ahead with new approaches. Among them:

n Reduce spending, opting to use less money from endowment funds for annual expenses.

n Turn to donors to add money to make up for losses, an especially popular approach at organizations that only recently started their endowments.

n Seek out alternative investments, such as hedge funds, in the hope of generating bigger returns.

No matter what strategy groups are trying, timing made a big difference as the markets were so volatile in 2011.

Groups whose fiscal years ended December 31 had flat growth on their investments, The Chronicle study found, while those with fiscal years ending June 30 reported median 17-percent gains.

Those results mirrored the wider stock market, which saw similar swings. The Standard & Poor’s 500 index finished 2011 flat from 2010 but jumped 28 percent from July 1, 2010, to June 30, 2011.

Spending Less

Many organizations with established endowments are facing three choices about how to manage those funds to support annual operations, says Bruce Myers, a managing partner at Cambridge Associates, a Boston endowment adviser:

• Invest in riskier portfolios to try to support existing spending levels.
• Stick with the current low-performing strategies and accept an eroded endowment.
• Reduce spending rates, which would mean cutting programs or grants or finding other revenue sources.

“They all have pain associated with them,” Mr. Myers said. “You have to do the hard work of thinking through the different options for your institution and choosing your pain.”

The Dayton Foundation, in Ohio, has chosen to continue limiting its spending to preserve the value of its investment over the longer term, says Michael Parks, its president.

The foundation, which has seen three years of negative returns and two years of gains during the past five years, decided this year to maintain its 4-percent spending rate to protect the value of its $330-million endowment rather than returning to its previous practice of taking 5 percent.

“Most distribution policies are trending downward,” Mr. Parks said. “We’re comfortable with 4 percent. We’re not looking at an increase in the near future.”

Other organizations are following a similar path. A recent Commonfund Institute survey showed that endowment spending rates declined from 5.8 percent in 2010 to 5.5 percent last year.

Crista Ministries, in Seattle, made a similar decision with its $5.4-million endowment, when its board voted in 2010 to reduce its spending from 5 percent to 4 percent, said Mark Crozet, vice president for fund development.

Mr. Crozet says the organization is not doing much to seek gifts to bolster the endowment.

“We will accommodate donors if they want to donate to it,” he added. “But our lead fundraising is focused on current activities.”

Raising More Money

Coastal Maine Botanical Gardens, in Boothbay, has taken a different approach, opting to ask its donors to help it increase the value of its endowment.

The organization established its endowment in 2007, the year it opened its 248-acre public garden. At the time, the Maine Community Foundation, which manages the fund, recommended a 5-percent spending rate.

But as the financial crisis ate into returns, the foundation lowered the spending rate to between 2.5 percent and today’s 4 percent, said Liana Kingsbury, senior foundation officer at the Maine Community Foundation. The botanical group did not spend anything in that first year of 2008 since fundraising was slow.

Dorothy Freeman, the botanical group’s philanthropy director, said her group initially hoped to raise $5-million for the fund within five years.

The endowment, which stood at $2.5-million last year, is now closer to $3-million thanks to a $24.5-million capital campaign.

“It has been a struggle,” Ms. Freeman said of efforts to start the endowment just as the recession was beginning.

Habitat for Humanity International is also actively seeking donations to support the growth of its young endowment, which was created in 2009 in response to requests by several donors who wanted to make long-term gifts to the organization. Before those donor inquiries, Habitat had never had an endowment.

“We ran the risk of not winning the gifts without an endowment,” said Robert Schmidt, senior director for planned giving at Habitat. “We didn’t have that tool, so I couldn’t go to planned-giving donors. That was the fear that motivated it.”

The gifts’ timing, which came during the height of the financial crisis, helped the 35-year-old group realize that endowments could help it “sustain programs throughout economic downturns,” Mr. Schmidt wrote in a newsletter appeal for endowment gifts that carried the headline “Serving families far into the future.”

In the first year, Habitat spent nothing from its $1.2-million endowment, which gained 49.5 percent in 2011 from a mix of stocks and bonds.

Habitat has set a flexible spending rate for the fund of 3 percent to 6 percent, which allows the group to adjust to how well its investments are doing, Mr. Schmidt says.

The Muscular Dystrophy Association started its endowment in 2010 with a $75,000 cash gift from Glen Guttormsen, a former university business administrator from Medford, Ore., to finance research into Duchenne muscular dystrophy, the disease that claimed Mr. Guttormsen’s 5-year-old son.

The organization initially resisted the idea.

“The resistance surrounded the concept that we should spend our money on our mission now and not lay up money for the future,” said Richard Brown, the association’s vice president for legacy gifts. “Our donors expect us to find cures and treatments.”

The organization ultimately decided to create the fund, but with a conservative approach. The endowment will not distribute any money until it reaches $500,000.

Once the spending is begun, however, 85 percent of whatever the fund earns will be distributed and the rest invested back into the principal. From the initial cash gift and further money from annuities, the fund currently stands at $225,000.

Alternative Investments

Many groups with large, established endowments are attempting to find better returns by investing less in traditional stocks and bonds and more in “alternatives” such as hedge funds, private equity, venture capital, and real estate.

Many groups that relied on this strategy—known as the Yale model because of the university’s success with such assets—took a big hit in 2009 and 2010, when many alternative investments posted significant losses.

But investments rebounded in 2011.

Groups with $1-billion or more invested a median of 44.3 percent of their endowments into alternative investments. By contrast, organizations with endowments of less than $100-million invested a median of 21 percent of their endowments into alternatives.

The riskier strategy paid off for the larger groups: Groups with endowments valued at more than $1-billion posted median returns of 13.6 percent in 2011, The Chronicle found.

But while larger groups have the assets to hire the best hedge-fund and private-equity managers, groups with small endowments with fewer resources should avoid the high-return allure of riskier alternative investments.

“If you don’t think you can manage them correctly, you shouldn’t be doing them,” said John Griswold, executive director of the Commonfund Institute, a think tank associated with a fund that manages nonprofit endowments.

Volunteer committees that meet quarterly to supervise portfolios in volatile markets are struggling to react appropriately to fast-changing economic conditions, Mr. Griswold said. Many end up hiring outsiders to manage investments.

“It’s a much more complex world than it was 10 years ago,” he said. “That’s what led to the whole outsourcing movement that has gained steam since the fiscal crisis, which exposed the weaknesses of having a volunteer committee meeting quarterly.”

It took the Associated: Jewish Community Federation of Baltimore three years to make up the losses it suffered due largely to the 2008 implosion of one of its hedge-fund managers, Satellite Asset Management.

The endowment’s value dropped 5 percent in 2008, from $483-million to $459-million. It fell another 23 percent in 2009.

“It was painful,” said Michael Dye, vice president at the Associated. “We lost a lot of money and spent the past three years building back.”

The group ultimately decided to stick with its remaining managers and its spending rates.

And it has increased its allocation in alternative investments over five years.

Mr. Dye says the federation benefited from its willingness to give the investment managers time to make their strategy work. In 2011, the market value of the endowment grew 20 percent from 2010.

But 2012 has been a tougher year, and the market value has dropped 4.5 percent. All funds can expect such volatility, say experts.

“We’ve been riding this roller coaster in the market,” said Mr. Myers. “I don’t think any of us has been through anything like this before.”

Emily Gipple and Emma Carew Grovum contributed to this article.