Investment returns grow for private foundations

Investment returns for private foundations grew to an average of 15.6 percent in 2013, net of fees, marking the second straight year of double-digit average returns, a new study says.

That growth compares to average returns of 12 percent in 2012 and average losses of 0.7 percent in 2011, says the 2013 Council on Foundations-Commonfund Study of Investments for Private Foundations.

The study, based on data from 153 private foundations with combined assets of $94.1 billion,  says foundations with assets over $500 million posted the highest returns net of fees, 16.5 percent, compared to 15.5 percent for foundations with assets from $101 million to $500 million, and 15.2 percent for those with assets under $101 million.

Three-year returns averaged 8.7 percent, up from 7.9 percent in 2012, while five-year returns surged to 12 percent from 1.7 percent, reflecting the fact the the loss of 25.9 percent in 2008 no longer is included in the calculation.

Ten-year returns averaged 6.8 percent, down from 7.9 percent in 2012.

As markets have recovered, foundations are increasing their return targets again, cautiously, as they continue to rebound from the financial pain of the collapse of the economy in 2008, the report says.

“With double-digit returns for the second year in a row, private foundations have regained solid financial footing positioning them well for community investment,” Vikki Spruill, president and CEO of the Council on Foundations, and John S. Griswold, executive director of Commonfund Institute, say in a statement.

Mission-related spending

Fifty-six percent of participating foundations increased mission-related spending, up from 47 percent a year ago, while only 26 percent decreased mission-related spending, down from 32 percent.

Asset classes

Domestic equities yielded the highest average returns, 31.8 percent, compared to 15.9 percent for international equities.

Returns averaged 7.3 for alternative strategies and 0.1 percent for short-term securities/cash/other, and a loss of 0.7 percent for fixed income.

Asset allocation

Asset allocation included 24 percent for domestic securities, down from 26 percent in 2012; 9 percent for fixed income, down from 11 percent; 20 percent for international equities, up from 16 percent; 42 percent for alternative strategies, flat from 2012.

Spending

The “effective spending rate” among participating foundations — the amount spent on mission divided by the foundation’s market value at the start of the year — grew to 5.5 percent in 2013 from 5.4 percent in 2012, returning the effective spending rate to the level reported in 2011.

Among all participating foundations, 36 percent reported an increase in their effective spending rate, 43 percent reported a decrease, and 16 percent reported no change.

Resources, management, governance

Private foundations on average employed the equivalent of 1.3 full-time professional staff devoted to investments, down from 1.4 in 2012 and 1.5 in 2011.

Twenty-five percent of all study participants, and 58 percent of foundations with assets over $500 million, employ a chief investment officer, while 73 percent of all participants use a consultant, down from 80 percent a year ago.

Thirty percent of participants have substantially outsourced their investment function, down from 38 percent last year, marking a return to the level reported in 2011.

Ninety-nine percent of participating foundations reported they have a conflict-of-interest policy.

Todd Cohen

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