• August 21, 2014

Investment Returns at Small Nonprofits Lag Far Behind Benchmarks in Bull Market

Small and midsize charities earned more money on their investments last year if they stuck with formal strategies and stayed on top of how much they paid their financial advisers, according to a new study.

The study of 261 organizations with budgets of $25-million or less, conducted by Raffa Wealth Management, found that overall investment returns for charities of all sizes increased 10.8 percent. Private and community foundations earned 11.5-percent returns.

The investment growth, while strong, trailed most investment benchmarks for 2013, a year when broad indexes of U.S. stocks shot up at least 30 percent.

“Performance relative to the traditional market benchmarks was really bad,” said Dennis Gogarty, Raffa’s president.

Still, the small groups did better than the big ones.

The Chronicle’s most recent survey of endowments at 209 mostly large foundations and nonprofits showed a median return of 8.4 percent for 2013.

Raffa’s figures were based on data from 77 charities, 19 private and community foundations, and 165 other tax-exempt groups, mostly associations.

Nearly 60 percent of the charities and foundations had budgets of $5-million or less.

The survey was intended to give small and midsize nonprofits data to compare their investment performance and practices.

Knowledge Gap

The Raffa study found that more than half of the nonprofits did not know how much they paid in fees to investment managers. Groups with small amounts to invest typically were less aware of their fees than wealthier organizations. Smaller nonprofits also tend to pay higher fees, providing an additional drag on returns.

“Those that didn’t know performed worse than their colleagues that did know,” Mr. Gogarty said. “We were surprised at how many didn’t know how much they pay in fees.”

The survey also found that groups with formal investment strategies for allocating their assets—nearly 60 percent of participants—increased investments by 12.7 percent last year from 2012. Nonprofits without formal investment strategies grew 6.3 percent. “That’s a huge difference,” Mr. Gogarty said.

The survey found that such discipline was rewarded in another way. Among the groups with formal investment plans, those that made changes to their plans saw smaller gains than those that stuck with their strategy.

“Keeping it simple really helped in 2013,” he said.

Average Return on Investments of Money in Long Term Reserves for Calendar Year 2013

Money in Reserve Association Public Charity Private/Community Foundation Other Overall
$5-million or less 7.9% 8.6% 11.7% 10.5% 8.7%
$5- to $25-million 13.4% 12.4% 10.0% 13.4% 13.1%
$25-million or more 14.9% 12.0% 12.1% 12.0% 12.9%
Overall 11.8% 10.8% 11.5% 12.0%  

Source: Raffa Wealth Management, "The Study on Nonprofit Investing"

 

Dig deeper: Read about how gifts have been propelling endowment growth and explore our endowment-survey data in a special Chronicle report.

Email Doug Donovan at doug.donovan@philanthropy.com.

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