June 25, 2009
Foundation Endowments Dipped in 2008, but Giving Rose
By Caroline Preston
Grant makers’ endowments plunged by 26 percent last year as the stock market fell to levels not seen in years, says a new report from the Commonfund Institute.
That was a sharply different picture from the one in 2007, when endowments grew by 9.9 percent. But foundations’ returns still compared favorably to the overall performance of the market.
The report was based on a survey of 221 private foundations and 69 community foundations. The Commonfund Institute is the education and research arm of Commonfund, which manages nonprofit endowments. Last year’s study surveyed foundations that held assets of at least $50-million, but this year, because so many suffered losses that pushed them below that cutoff, the minimum was $10-million.
The foundations’ returns declined by 3.1 percent when calculated over a three-year period, compared with growth of 10.8 percent for the three-year period ending in December 2007. Five-year returns were still slightly positive (2.2 percent), down from 13 percent for the five-year period ending in 2007.
Giving Was Up Slightly
Yet the average share of their funds that foundations gave away increased slightly, to 5.8 percent from 5.5 percent in 2007.
Forty-five percent of foundations in the survey said they had increased their spending by an average of 20.4 percent—five times the rate of inflation.
“These are institutions that, even in hard times, are cognizant of their missions and their responsibilities, and are trying to keep faith with their program grantees and people who rely on them for support,” said William Jarvis, managing director at the Commonfund Institute.
Mr. Jarvis, of the Commonfund Institute, said the investment performance of foundation endowments was roughly on par with that of the educational organizations and operating charities his group had also surveyed. “The big news is that all types of charities were affected more or less equally by the market downturn in the final quarter of last year,” he said.
But wealthier foundations performed slightly better. Endowments of less than $50-million recorded a decline of 28.5 percent, compared with 24.6 percent for endowments worth more than $1-billion.
Only Fixed Income Grew
Declines were reported across all types of investment categories except for fixed income, which grew by 0.6 percent.
Investments in international equities reported the sharpest drop (down 41 percent), followed by domestic equities (down 36.3 percent). Alternative strategies as a whole posted losses of 16.4 percent. Among them, venture capital and private equity performed the best, with losses of 6.2 percent and 7.8 percent, respectively.
Foundations in the study held, on average, 36 percent of their money in alternative strategies, 27 percent in domestic equities, and 16 percent in fixed income.
Alternative investments grew as a share of foundations’ overall endowments in 2008. But Mr. Jarvis said that foundations’ share of funds in alternative investments, which cannot be sold off as quickly as some other types of assets, would probably decline this year.
(The Chronicle of Philanthropy’s annual endowment study examined returns of foundations and other nonprofit organizations. Subscribers have exclusive access to the results.)
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This report from the Commonfund Institute provides much needed data on what happened to foundation investments during 2008. However, it is my understanding that many hedge funds and “funds of funds” have been restating their original 2008 returns throughout 2009, with the new numbers being significantly lower than the original ones. I wonder whether these restatements would significantly affect the report’s results to the downside.
Also, there is another non-traditional type of investment that often performed positively for many foundations during 2008—Mission Investing and in particular Community Investing. For some foundations, their Mission Investments had a positive return, with other investments having a substantial negative return. This raises the issue as to whether Mission Investments should be considered by many foundations not just as a way to enhance grantmaking, but also as a valuable HEDGE against a market downturn. This latter view would require that appropriate Mission Investments be a standard portion of any well balanced foundation portfolio.
Floyd Keene
President
The Triple EEE Foundation
— Floyd Jul 5, 09:50 AM #
As Mr. Jarvis points out, the drop in foundation returns mirrors that of educational institutions and operating charities from other Commonfund surveys. However, it’s interesting to note that the smallest endowments in the foundation survey, those under $50MM, suffered the largest investment declines. This is in contrast to educational institutions with less than $100 million, the smallest “slice” of that survey, which suffered the smallest declines when compared to other endowments, including those with over $1 billion. In each case, the fixed income asset class played a role in that bonds’ performance was superior to all others. The smallest educational institutions had a preponderance of fixed income and a small to negligible allocation to alternatives to ensure adequate liquidity.
Furthermore, in light of foundations’ practice of calculating spending policies by averaging rolling quarters’ returns, 2008 payouts were very likely expected to compare favorably to prior years’. However, some foundations did pull back, recognizing the potential impact of 2009’s investment returns. These returns will ripple through for a few years, again due to the manner spending policies are structured.
— Lee Boveroux Jul 7, 11:33 AM #