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

Health care groups urged to diversify investments

Health care organizations should adopt a new endowment model that reduces their reliance on fixed income assets such as bonds and cash, and increases allocations to alternative investments and other illiquid assets, a new white paper says.

The new model was developed over three decades by educational institutions and increasingly adopted by other types of nonprofits, and shifting to it and reaping benefits from it could take decades, making that shift “all the more urgent,” says Assessing the State of Healthcare, the white paper from the Commonfund Institute.

“It is in the interest of health care organizations, rating agencies and donors that health care endowments evolve toward becoming more like those of other long-term nonprofit institutions,” the white paper says.

Nonprofit health care organizations typically operate with “razor thin margins, or even at a deficit, the paper says, and they get revenue from reimbursement from government, by far the biggest source, and from income from private insurers and self-pay patients, and through support from donations or transfers from endowments they may have.

Any excess of reimbursements and income from insurers and patients over costs represents the “operating margin” for these organizations.

A 2012 Commonfund study found that, among 86 nonprofit health care organizations surveyed, the median operating margin in fiscal 2011 was 4.1 percent, up from 2.9 percent in fiscal 2008.

The increase reflects cost cutting across the industry, with big health care organizations making the greatest progress but smaller organizations catching up.

Large organizations made early progress “because they realized they would have to reduce operating expenses and took steps to change their cost structures to capture greater economies of  scale.”

Smaller health care organizations followed the lead of those bigger organizations, taking “what actions they could to lift their previously low — and even negative — operating margins.”

But because bigger groups can spread cost reductions over a wider base of patients and constituents and weather reimbursement reductions the paper says, they will reap greater benefit than smaller and mid-sized groups with proportionately higher fixed costs.

Those smaller and mid-sized organizations will rely more heavily on endowments to “enhance surpluses and make up for losses,” the paper says.

Most health systems use bond issues to fund construction projects and improvements, it says, and successful bond offerings depends in large part on the bonds earning a high rating from bond rating agencies.

And bond agencies “look not only to the ability of the health care provider to generate cash flow but also to the liquidity of its endowment’s financial assets as a potential backstop source of repayment,” the paper says.

As a result, it says, assets allocations of health care endowments tend, on average, to be weighted more heavily toward cash and fixed income investments than those of other types of nonprofits.

And that bias away from traditional equity investments generally have returned less per year than other nonprofits, the paper says.

“This practice seems increasingly to resemble a luxury that will eventually become unsustainable as other sources of revenue for health care organizations continue to diminish,” it says.

While allocations to fixed income investments and cash total nearly 40 percent of the portfolio of the average nonprofit health care organization, the paper says, health care organizations are better off with more highly diversified portfolios, managed “with prudent regard to liquidity,” to support bond repayment.

For small and mid-sized health care organizations that “lack the ability to spread costs over a wider patient base,” the paper says, “a greater degree of reliance on endowment income appears inevitable, and there is little time to lose.”

— Todd Cohen

Investment returns plunge for higher-ed endowments

Investments on endowments for U.S. colleges and universities lost 0.3 percent on average, net of fees, in the fiscal year ended June 30, 2012, a deep plunge from the average return of 19.2 percent a year earlier, a new report says.

Ten-year returns for fiscal 2012 totaled 6.2 percent, compared to 5.6 percent a year earlier, “suggesting that long-term performance for many institutions continues to improve, says the 2012 NACUBO-Commonfund Study of Endowments.

The biggest endowments, or those with assets over $1 billion, produced the highest return in fiscal 2012, or 0.8 percent, while the smallest, or those with assets under $25 million, produced the smallest return, 0.3 percent, says the study, which is based on data from 831 colleges and universities with $406.1 billion total endowment assets.

Three-year returns averaged 10.2 percent, while five-year returns averaged 1.1 percent, both net of fees, with endowments with assets over $1 billion generating the highest average returns over three, five and 10 years.

Among asset classes, fixed-income investments generated the highest return, 6.8 percent on average, while international equities produced the lowest return, a loss of 11.8 percent.

Domestic equities returned 2 percent, alternative strategies as a group returned 0.5 percent, and short-term equities, cash and other assets returned 0.2 percent.

“With the exception of periods such as the recent economic crisis, institutions with the largest endowments have reported the highest one-year returns,” says a joint statement by John D. Walda, president and CEO at NACUBO, and John S. Griswold, executive director at Commonfund Institute.

That trend was reflected in the data for fiscal 2012, as well as for the “trailing” periods that showed results for three, five and 10 years, they say.

They attribute that outperformance to “well diversified portfolio with an equity bias, the ability to make long-term commitments to less liquid strategies, access to top-tier investment managers, and greater resources, including larger staffs, leading-edge technology and experienced investment committees.”

The effective spending rate at participating institutions in fiscal 2012 was 4.2 percent, down from 4.6 percent a year earlier, with the largest institutions, or those with assets over $501 million, posting the highest effective spending rate, an average of 4.7  percent, and the smallest, or those with assets under $51 million posting average rates under 4 percent.

In fiscal 2012, 39 percent of institutions reported they received less in gifts than a year earlier, while 41 percent reported an increase.

The median total of new gifts was $2.2 million in fiscal 2012 and the average total of new gifts was $8 million, with institutions with assets over $1 billion posting the highest median and average gifts by far.

Among the 616 institutions that reported they carry debt, average total debt was $187.5 million on  June 30, 2012, down from $189 million a year earlier, while media debt grew to $56.7 million from $56.2 million.

Debt service as a share of the operating budget averaged 5.4 percent, essentially unchanged from a year earlier.

Institutions employed the equivalent of 1.6 full-time employees to manage their endowments, unchanged from a year earlier, with the largest endowments employing an average of 10.9 full-time employees and the smallest employing an average of 0.3 employees.

Eighty-two percent of institutions reported using an outside consultant, up 1 percentage point from a year earlier.

Seventy-one percent of institutions said they do not apply environmental, social and governance criteria to portfolio holdings, the same as a year earlier.

Of the 149 institutions that do use some of those investment criteria, 60.1 percent of their portfolio reflects the use of negative screens, with percent of those 149 institutions voting proxies consistent with their screening criteria and 72 percent reporting that screening is a formal institutional policy.

Todd Cohen

Cumberland funder to help raise $20 million for nonprofits

By Todd Cohen

FAYETTEVILLE, N.C. — The Cumberland Community Foundation has launched an effort help local nonprofits raise a total of $20 million in endowment funds by 2020.

The Foundation already is working with 30 nonprofits and manages endowments for many of them.

“The idea is to build sustainable support for our lead nonprofit organizations that generate revenue for them every year,” says Mary Holmes, executive director.

The effort will include working with each nonprofit to identify its needs for training and support to build its endowment and planned giving.

The Foundation then will provide free assistance to the nonprofits to help train their boards and staffs to communicate and work with donors to cultivate endowed gifts.

The endowments for the nonprofits will be housed at the Foundation, which will charge its standard fee of 1 percent or less to partially offset the costs of administering the endowments, including accounting, investment management, gift processing, reporting to donors and regulatory compliance.

Total assets at the Foundation, which was formed in 1980, grew to an all-time high of $60 million in September, including $50 million in endowed assets.

The Foundation makes about $3 million in grants a year, and in June exceeded $30 million in grants it has made since it was founded.

On Nov. 1, it announced $440,000 in grants.

Those include grants of $250,000 to Communities in Schools of Cumberland County to support work to reduce high school drop outs, $125,000 over five years to Better Health of Cumberland County to address childhood obesity, and a total of a $65,000 to Fayetteville Family Life, Coordinating Council on Older Adults, Child Advocacy Center and Vision Resource Center to help those suffering with mental health issues and their families.

Total assets at the Foundation have grown from $7 million 15 years ago, and over 86 percent over the last five years, but the endowments the Foundation manages for nonprofits have not grown at the same rate, Holmes says.

“The difference is that most of the nonprofits are living hand-to-mouth and they’re on the gerbil wheel,” she says. “They can’t pause on their annual fundraising long enough to think about sustainability. We have really smart people running great nonprofit organizations. There’s just not enough annual support.”

To help develop its new sustainability initiative, the Foundation held four focus groups with senior executives from 15 nonprofits talk about the readiness of their organizations and boards to create and build endowments, their current strategy, and the support they would need from the Foundation.

“Every nonprofit is on a continuum of readiness to build endowment,” Holmes says. “We’re’ helping them reach out to donors to build endowments they already have, but also helping them reach donors to create new endowments.”


Healthcare groups post flat investment returns

Investment returns for 86 nonprofit healthcare organizations were flat in fiscal 2011 following net gains of 10.9 percent in fiscal 2010 and 18.8 percent in fiscal 2009, a new study says.

For those same organizations, average annual net return on investable assets totaled 9.6 percent for the trailing three years, and 1.8 percent for the trailing five years, says the 2012 Commonfund Benchmarks Study of Healthcare Organizations.

Defined benefit plan assets for participating organizations performed better, averaging returns of 1.3 percent, although that also was significantly lower than their average net return of 12.3 percent in fiscal 2010.

Three-year returns for defined benefit plans averaged 11 percent, and five-year returns averaged 2.2 percent.

Participating organizations represented $99.8 billion in investable assets ad $42.4 billion in defined benefit plans as of Dec. 31, 2011.

Healthcare organizations also made a big shift to alternative investment strategies in their asset allocation, increasing those investments to an average of 21 percent of assets in fiscal 2011 from 17 percent in fiscal 2010.

“Healthcare organizations’ higher allocation to alternatives is an ongoing trend that mirrors what we have found in recent annual studies of colleges and universities, foundations and operating charities,” John S. Griswold, executive director of Commonfund Institute, says in a statement.

Among all asset classes, fixed income provided the highest return, an average of 5.4 percent, followed by alternative strategies, 3.9 percent; short-term securities/cash, 0.2 percent; domestic equities, a loss of 0.2 percent; and international equities, a loss of 10.9 percent.

Todd Cohen

Higher-education endowments post loss

The return on investments for endowments at U.S. colleges and universities plunged in the fiscal year ended June 30 from the previous year and posted a loss, preliminary data show.

Endowments at 463 U.S. colleges and universities lost 0.3 percent on average, net of fees, in fiscal 2012, compared to an average return of 19.2 percent in fiscal 2011, according to preliminary data from the 2012 NACUBO-Commonfund Study of Endowments.

The largest and smallest endowments posted the best returns, while mid-range endowments reported losses.

Institutions with endowment assets over $1 billion reported the highest average returns of 1.2 percent, compared to 0.1 percent for those with assets from $501 million to $1 billion, and 0.2 percent for those with assets under $25 million.

Institutions with endowment assets from $51 million to $100 million lost 1 percent, compared to 0.8 percent for those with assets from $25 million to $50 million, and 0.5 percent for those with assets from $101 million to $500 million.

Returns for all institutions in the sample ranged from 15.8 percent to a loss of 9.5 percent.

Among a slightly smaller sample of 215 institutions, trailing three-year returns averaged 10.4 percent, trailing five-year returns averaged 1.5 percent, and trailing 10-year returns averaged 6.1 percent, all net of fees.

The data for fiscal 2012 and for the longer periods all “confirm the historic patterns of outperformance by larger institutions, chiefly those with assets in excess of $1 billion,” NACUBO and the Commonfund Institute say in a statement.

The pattern was interrupted in the financial crisis of 2007 to 2009, when smaller institutions tended to outperform as a result of their larger allocations to fixed income and shorter-term securities, they says.

Institutions with endowments of different sizes reported widely varying asset allocation, the data show.

Allocations to domestic equities average 10 percent for institutions with assets over $1 billion, for  example, compared to 37 percent for those with assets below $25 million.

The most significant trend in asset allocation for higher education over the past 10 years, the data show, has been growth in allocations to alternative strategies, particularly among larger institutions.

The effective spending rate in fiscal 2012 for 215 institutions reporting that data averaged a total of $5.8 million, while the median total for gifts was $2 million.

Both average and median gifts were highest, by far, among institutions with assets over $1 billion, with gifts correlating with the size of institutions, shrinking with smaller institutions.

Todd Cohen