Community foundations see growth in assets, gifts, grants

Assets of community foundations in the U.S., as well as gifts to them and grants from them, all grew in 2013 compared to 2012, a new report says.

Assets grew at nearly all the 285 community foundations surveyed, and 90 percent of those foundations now manage assets that exceed levels in 2007 before the economy collapsed, says Guideposts for  Growth and Aspirations, a report from the Council on Foundations and CF Insights.

It says donor advised funds continue to drive growth and grantmaking for community foundations, representing roughly 40 percent, on average, of total gifts they receive and grants they make.

Administrative fees continue to represent the most significant revenue source for community foundations, the report says, and operating budgets to continue to grow as community foundations invest more in staff and leadership.

Assets, gifts, grants

Total assets of community foundations grew to $66 billion in 2013, up from $58 billion in 2012.

Total gifts to community foundations grew to $7.5 billion from $6.9 billion, while while total grants they made grew to $4.9 billion from $4.5 billion.

Assets grew 15 percent for community foundations, regardless of the size of their total assets.

While big gifts can have a big impact on the average change in assets for community  foundations, the report says, overall there was no change in average gifts between 2012 and 2013.

However, assets grew 12 percent for foundations with more than $250 million in assets, while they fell 7 percent for foundations with $50 million to $249 million in assets, and grew less than 1 percent for foundations with less than $49 million in assets.

Grantmaking

Grants from community foundations grew 11 percent for those with assets of more than $250 million, 13 percent for those with assets from $50 million to $249 million, and 9 percent for those with assets of less than $49 million.

Grants grew for nearly half of community foundations surveyed, and fell for roughly one-fourth.

Compared to assets and gifts to community foundations, grants tend to be steadier from year to year because of the impact of spending policies applied to endowed assets, the report says, , although the prevalence of non-endowed donor advised funds under management also can have an impact.

Donor advised funds

Community foundations surveyed hold more donor advised fund assets than Fidelity Charitable, Schwab Charitable and Vanguard Charitable — the three largest national providers of donor advised funds, the report says.

Community foundations held $20.3 billion in donor advised funds in 2013, up from $16.3 billion in 2012, compared to $18.78 billion in 2013 held by the three national donor advised funds, up from $13.6 billion in 2012.

While national donor advised funds received $6.6 billion in gifts in 2013, compared to $4.3 billion in gifts to the donor advised funds at community foundations, total grants from the two groups were similar — $2.9 billion from the national donor advised funds, compared to $2.6 billion from donor advised funds at community foundations.

Administrative fees

Administrative fees still provide the most significant revenue source for community foundations, regardless of asset size, the report says.

Still, it says, larger community foundations, or those with assets of more than $250 million, depend more heavily on revenue from administrative fees than do smaller community foundation, which count on other revenue streams like fundraising and disbursements from operating endowment and reserves.

Administrative fees represented 75 percent of $5.9 million in average total revenue at community foundations with over $250 million in assets, 73 percent of average total revenue of $1.5 million at community foundations with $50 million to $249 million in assets, and 61 percent of average total revenue of $447,000 at community foundations with up to $49 million in assets.

Operating  capacity

Over three-fourths of community foundations surveyed invested more in their operating expenses in 2013 than in the previous year.

And operating budgets that grew at community foundations operating budget increased 17 percent on average.

The share of community foundations that increased their operating budget grew to 77 percent in fiscal 2013 from 72 percent in fiscal 2012 and 2011, 48 percent in fiscal 2010, and 54 percent in fiscal 2009.

Spending on staff

Costs associated with staff salaries and benefits represented roughly two-thirds of total  community foundation expenses in fiscal 2013, on average, regardless of asset size.

Average staff size, and staff costs as a share of total costs, were 39 and 64 percent, respectively, at community foundations with over $250 million in assets, 12 and 62 percent at community foundations with $50 million to $249 million in assets, and 4 and 61 percent at community foundations with less than $49 million in assets.

Todd Cohen

Private foundation assets grow; payout exceeds required 5%

Private foundations with assets under $50 million posted strong growth in 2013, a new report says.

Assets of those 84,000 foundations, which represent 98 percent of all U.S. foundations, grew 14.1 percent to $2.69 billion, says the 2014 “Annual Report on Private Foundations” from Foundation Source.

Those foundations also distributed 7.3 percent of their assets, exceeding the 5 percent payout for private foundations required by law, says the report, which is based on $148 million in grants by 714 Foundation Source clients.

The 2 percent of all foundations that are the largest, in comparison to those tracked in the report, hold roughly 70 percent of all foundation assets, Foundation Source says.

It was the second straight year assets grew at foundations in the report, reflecting “continuing and sustained recovery of the economy in general,” Foundation Source says.

“Endowment growth was the product of both investment returns and new contributions to the foundations by their funders,” it says.

Thirty-five percent of private foundations studied distributed over 10 percent or more of their assets.

Each year since the recession began in 2008, the report says, distributions by private foundations have consistently exceeded the 5 percent minimum, although aggregate giving in real dollars fell 2.5 percent in 2013, suggesting a “rebuilding” year by some foundations, the report says.

Foundations with assets under $10 million awarded nearly as much in general support as in grants for specific projects.

Foundation Source says that level of investment in general support contradicts the view “that foundations rarely provide general operating support.”

The report also says foundations with assets of $10 million to $50 million gave three times as much in grants for specific purposes as in grants for general support.

That suggests “a preference for project funding as foundations increase in asset size,” Foundation Source says.

Todd Cohen

Education endowments rebound

Endowments at U.S. colleges and universities posted investment returns averaging 11.7 percent, net of fees, in the fiscal year ended June 30, 2013, marking a strong recovery from losses averaging 0.3 percent a year earlier, a new study says.

Among 835 U.S. colleges and universities that provided data for the 2013 NACUBO-Commonfund Study of Endowments, with endowment assets totaling $448.6 billion, the portion of their operating budget funded by their endowment averaged 8.8 percent.

That ranged from of a high of 16.2 percent for schools with assets over $1 billion to a low of 2.5 percent for schools with assets under $25 billion.

Domestic equities generated the highest average return in fiscal 2013, at 20.6 percent, net of fees, followed by international equities, at 14.6 percent; alternative strategies, 8.3 percent; fixed income, 1.7 percent; and short term securities, cash and other, 1.2 percent.

Three-year returns for participating schools averaged 10.2 percent, while five-year returns averaged 4 percent, and 10-year returns averaged 7.1 percent.

Endowments with assets under $25 million reported the highest average three-year and five-year returns, at 10.6 percent and 4.9 percent, respectively, while those with assets over $1 billion generated the highest average 10-year return, at 8.3 percent.

“This year’s investment results reflect in large measure the strength in publicly traded equities that has prevailed since early 2009,” John Griswold, executive director at Commonfund Institute, says in a statement.

While larger endowments performed better over a 10-year period, smaller endowments with higher allocations to domestic equities have performed well in the shorter term, he says.

Asset allocations remained stable, with participating schools allocating 53 percent of their portfolios to alternative strategies, compared to 54 percent a year earlier.

Alternative strategies include marketable alternatives such as hedge funds; private capital; distressed debt; and private equity real estate.

The effective spending rate for the 835 schools averaged 4.4 percent, up from 4.2 percent a year ago.

Schools with assets over $1 billion reported the highest spending rate, 4.8 percent, while schools with assets under $25 million reported a spending rate of 4.1 percent.

Fifty-one percent of schools reported an increase in gifts while 30 percent reported a decrease.

Among those reporting an increase, the median increase was 55.8 percent, and among those reporting a decrease, the median decrease was 33.9 percent.

The median total of new gifts to endowment was $2.3 million, and the the average gift was $9.4 million, up from $8 million a year earlier.

John D. Walda, president and CEO at NACUBO, says in a statement that, despite the improvements in investment returns over the past year, colleges and universities “are in a period of rethinking their budget-setting strategies and priorities.”

The past 10 years of volatile financial markets and deep cuts in government funding for higher education, as well as declines in enrollment and tuition revenue at some schools, he says, provide a context for the strong endowment performance in fiscal 2013 that reflects “continuing stress on tuition, state government appropriations and other revenue sources.”

Among 638 schools that reported they carry debt, average total debt was $204.3 million on June 30, 2013, up from $187.5 million a year earlier, while median debt was $56.3 million, down from $56.7 million a year earlier.

Thirty-one percent of study participants reported their schools increased the level of debt in fiscal 2013, while 62 percent reported a decrease.

Endowments reported they employed the equivalent of 1.6 full-time staff devoted to investment management, unchanged from the previous year.

Fifty percent of participating schools reported they employ risk limits in their portfolios, while 28 percent do not.

And 18 percent of participating schools reported they apply environmental, social or governance criteria, or ESG policy, to portfolio holdings.

Among the 157 schools with some form of ESG policy, 58.6 percent of their portfolio reflects the use of negative screens, 47 percent vote proxies consistent with their ESG criteria, and 70 percent say ESG investing is a formal institutional policy.

Todd Cohen

Investment returns surge at education endowments

Investment returns on endowments at 461 U.S. colleges and universities averaged 11.7 percent, net of fees, in the fiscal year ended June 30, a sharp reversal from the previous year, when returns on average lost 0.3 percent, new data show.

Among 206 schools that completed a survey for the 2013 NACUBO-Commonfund Study of Endowments, returns averaged 10.4 percent over three years, 4.3 percent over five years, and 7.1 percent over 10 years.

The average allocation to alternative investments fell to 47 percent of participating endowments’ portfolios from 54 percent a year earlier, according to preliminary data, showing a “pause in the long trend of growth in schools’ allocation to alternative investment strategies,” Commonfund and NACUBO say.

Offsetting that decline was an increase in allocations to publicly traded equities, with participating institutions’ average allocation to domestic equities growing to 20 percent from 15 percent, and their allocation to international equities growing to 19 percent from 16 percent.

The allocation to fixed income investments was unchanged at 11 percent, while the allocation to short-term securities, cash and other investments fell to 3 percent from 4 percent.

Among 206 institutions included in the preliminary data, the effective spending rate, or the amount of spending specified by the board from the investable assets, usually expressed as an annual percentage of the beginning market value of the fund, averaged 4.2 percent, unchanged from the previous year.

Half of participating schools reported an increase in gifts, while 30 percent reported a decrease in gifts.

Endowments reported an average of the equivalent of 1.2 full-time employees devoted to investment management, down from the equivalent of 1.6 full-time employees the previous year.

Some of that “marked decline,” the study says, may be the result of an increase in outsourcing.

Forty-two percent of study respondents said they had substantially outsourced the investment management function, up from 38 percent the previous year.

And 45 percent of participating schools say they employ risk limits in their portfolios, while 33 percent say they do not.

Todd Cohen

Responsible investing evolves, raises questions

The market for socially responsible investing is changing, and institutional investors should pay attention to its growing influence and visibility, a new study says.

A recent report estimated that at the end of 2012, the responsible investing market had $3.74 million in assets under management, or 11.2 percent of the $33.3 trillion in total assets under management in the U.S., says the study by Commonfund Institute.

While responsible investing has grown and “is more than a passing trend,” its purpose has moved from a “practice of negative screening and exclusion of certain types of investment to one seeking or encouraging certain characteristics in portfolio companies,” says the study, From SRI to ESG: Changing the World of Responsible Investment.

In the face that evolution, it says, investment professionals continue to debate “whether a portfolio’s long-term performance can be enhanced by including environmental, social and governance (ESG) considerations in the security selection process.”

Long history

While responsible investing dates from the colonial era, when some religious groups refused to invest their endowment funds in the slave trade, the study says, socially responsible investing first took shape as an investment philosophy in the 20th century.

In 1921, Pioneer Group became the first mutual fund to screen out tobacco, alcohol and gambling investments, the study says, and social responsible investing, or SRI, was adopted in the 1960s by civil rights, environmental, social and antiwar protest movements.

As environmental awareness grew in the 1970s, the first funds were introduced that looked at issues beyond traditional “sin” investment screens, the study says, and the movement against apartheid in South Africa led to creation of the first funds that screened out companies doing business in a specific country.

The number of SRI mutual funds grew to nearly 60 by the mid-90s, and SRI assets under management totaled about $640 billion, the study says, with climate change, corporate scandals and humanitarian crises emerging as new concerns in the 21st century.

Changing models

Models for responsible investing also have changed, the study says.

Socially responsible investing, the traditional model, build portfolios that aim to avoid investments in specific stocks or industries through negative screening, it says, while “impact investing” aims to invest in projects or companies with the express goal of bringing about mission-related social or environmental change.

What now has emerged, the study says, is known as “environmental, social and governance investing,” or ESG, which integrates ESG factors into “fundamental investment analysis to the extent that they are material to investment performance,” the study says.

Beyond negative screening

While the negative screening used in SRI “can be a useful tool for institutions desiring to express ethical, religious or moral values through their investment portfolio, the study says, it may prove too restrictive for many because it “limits the range of securities available for investment.”

ESG analysis, it says, takes a “broader view” by examining whether environmental, social and governance issues “may be material to a company’s performance, and therefore to the investment performance of a long-term portfolio.”

Inconsistent standards

Preliminary studies suggest that while “integrating ESG issues into fundamental investment analysis procedures can improve investment performance, it still is too early to draw comprehensive conclusions,” the study says.

ESG data reported by companies is of “varying quality,” it says, and the “lack of consistent standards or reporting methods makes it difficult for investors to compare investments with confidence.”

Users of ESG data continue to call for “more standardized reporting mechanisms to improve the quality of data that is at the heart of any analysis of risk and materiality,” it says.

Determining long-term impact

“ESG risk factors affect company performance over the long-term,” it says. “Managers and investors hoping to gain a competitive advantage by adding sustainability practices to an organization’s strategy appear unlikely to obtain short-term outperformance.”

And different analysts have different perspectives “on how long it takes to confirm an impact from ESG risk factors,” it says.

It also says that while ESG investing practices traditionally have applied most broadly to publicly traded equities, the broad category of alternative investments “pose challenges to traditional ESG analytical methods because of the relatively opaque nature of their investment processes.”

Extent of ESG use

The 2012 NACUBO-Commonfund Study of Endowments reported that  among institutions of higher education, 18 percent of the 831 responding institutions used at least one of the ESG criteria in managing their portfolios, the study says.

And the 2012 Commonfund Benchmarks Study of Foundations found the use of ESC criteria more limited, it says, with only nine percent of responding institutions saying they use ESG in their investing process.

Getting started

Boards of institutions considering using ESG might create a working group, in the form of a subcommittee of the board or investment committee, to study the issues and the possible application of ESG processes and principles to the institution’s investment portfolio, the study says.

Institutions also might retain an adviser with expertise in ESG to conduct an initial analysis of the portfolio to determine a “baseline of exposure to defined ESG issues,” it says.

Institutions also may want to put in place procedures for measuring and monitoring their exposure to ESG factors on an ongoing basis, it says.

“Whether or not a particular institution decides to add ESG practices to its investment toolkit,” the study says, “fiduciaries will need to bear in mind its presence and, potentially, its increasing influence and visibility.”

Todd Cohen

Peace says retail-center deal won’t alter endowment target

By Todd Cohen

RALEIGH, N.C. — William Peace University in Raleigh says its planned purchase of a nearby retail center and surrounding properties — a deal for which it reportedly will spend $20.75 million from its $33 million endowment — will not change the projected rate of return on the investment of its endowment assets.

“The University’s projected return on its endowment is 5.5% over a rolling three-year period, which reflects the long-term investment objective of the fund,” Julie E. Ricciardi, vice president in the Office of Engagement at Peace, says in a September 13 letter to fundholders. “The 5.5% objective is the same as before and after the Seaboard Station purchase.”

The letter does not give details of revenue Peace expects to generate from the retail center and other sources to achieve its projected rate of return on its endowment once the bulk of current endowment assets are used to buy the new properties.

Ricciardi did not return phone calls on Monday and Tuesday.

A bankruptcy court judge in August okayed the purchase, which has sparked fears among some tenants and residents of nearby neighborhoods that Peace might close the retail center and use the land for university purposes, according to a newspaper report.

Some university donors and alumnae worry that such a big investment from the school’s endowment in a single project is risky, but Peace has said it plans to keep the retail space, the newspaper report said.

The letter to fundholders characterizes the endowment as a “pooled income fund” that includes funds created by fundholders and is “invested in a number of things.”

Some part of the endowment “may be used to permit the acquisition” of Seaboard Station and nearby properties “if the purchase is completed,” the letter says.

As of the date of the letter, it says, the purchase had not been completed.

“After careful consideration, the Board of Trustees determined that investment of the endowment funds in the Seaboard Station property is in the best interests of the University and is a prudent investment,” the letter says.

“The annual income from your fund, determined based upon the collective returns of the endowment fund, must be used to provide scholarships, etc. and the nature of the underlying endowment will not change that purpose,” it says.

The endowment principal “will always be calculated upon its share of the endowment fund’s value,” the letter says.

“The fund is valued each year based upon its earnings and the fair market value of the investments held,” it says.

“The then current fair market value of real property investments, such as Seaboard Station, will be determined each year and the value will be reported on the annual information return that the endowment fund files with the IRS,” the letter says. “The return is made publicly available. That has not changed.”

The value of endowment assets invested in Seaboard Station “will reflect the market value of the property,” the letter says. “It is premature to state what that market value is as the property is currently being valued.”

Nonprofit investors expect portfolio growth

Nonprofit institutional investors and pension funds expect portfolios to grow in 2013 and over the next three years and five years, a new survey says.

Among 217 institutional investors with combined assets of $123 billion who attended the Commonfund Forum and responded to the third annual Commonfund Investor Outlook Survey, investment in emerging markets also is expected to continue to grow.

Investors’ average forecast for the S&P 500 Index is for growth of 7.9 percent, with a median forecast of 8 percent.

Seventh-eight percent of respondents expect the MSCI Emerging Markets Index to outperform the S&P 500 Index over the next three years, compared with 75 percent who expected that last year.

And 55 percent expected to significantly increase allocations over the next 12 to 18 months in their emerging market equities, compared with 53 percent who expected that last year.

Investors’ average expectation is for portfolios to grow 7.6 percent in 2013, and a median expectation they will grow 7 percent, compared to an average expectation of 7.4 percent in 2012 and a median expectation of 8 percent growth.

Investors’ average expectation is for portfolios to grow 7.3 percent over the next three years, and a median expectation they will grow 7 percent, compared to an average expectation of 7.2 percent and a median expectation of 7 percent in the three years ended in 2012.

Investors on average expect portfolios to grow 7.4 percent over the next five  years, and a median expectation they will grow 7 percent, compared to an average expectation of 7.6 percent and a median expectation of 7 percent in the five years ended in 2012.

“Institutional expectations for the markets and select asset allocations such as emerging markets indicate that participants continue to be net positive about 2013,” Verne Sedlacek, president and CEO of Commonfund, says in a statement.

“The data show that overall concerns about downside risk has been reduced since last year,” he says, “although respondents are still very worried about achieving their investment return goals.”

— Todd Cohen