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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Board effectiveness tied to ‘cultural forces’ at nonprofits

The success of nonprofit boards, whose role has changed dramatically and become increasingly critical to the success of their organizations, depends on

“cultural forces” on the board and at the nonprofit, a new white paper says.

Those culture forces include capable leadership, a sound organizational structure, attention to fiduciary duties, and a culture that binds board members to one another in a cohesive unit, says the white paper from Commonfund Institute.

“How well a board functions determines, in large measure, the fortunes of the organization it governs,” the paper says. “Mediocre or middling performance may enable an organization to survive, but rarely to thrive, while weak or dysfunctional boards may jeopardize their organization’s very existence.”

Strategy, not tactics

The paper, “Strive for the Best: Building and Maintaining an Excellent Board,” says a board’s role is strategic, not tactical, and that its main task is oversight, or reviewing and assessing management’s success in carrying out its job.

The board should engage in active supervision of management and staff, it says, setting standards that are clear and objective, making sure job descriptions are known and understood, and seeing that senior staff members do a good job supervising the organization’s actual operations.

Because of its fiduciary responsibilities, a board must protect it’s nonprofit’s mission and protect against drifting from that mission in ways its charter does not permit, says the paper, which was written by John S. Griswold, executive director of Commonfund Institute, and William F. Jarvis, managing director.

Purpose and direction

In defining the mission and monitoring progress, the paper says, the board must provide purpose and direction to the staff, while in its oversight duties it needs to stay focused on governance and avoid getting involved in operations.

The paper says policies must be in place so that in case of conflicts of interest — with board members’ own interests, or with the interests of another organization with which board members are involved — the conflict will be disclosed and neutralized.

The structure of a board can help or hurt its effectiveness and is key to improving its performance, the paper says, and smaller boards generally are believed to function more effectively.

Picking board chair, executive director

Selection of the board chair is the single most crucial factor in a board’s success, and board orientation is the crucial first step, the paper says. A particularly useful practice, it says, is to assign an existing board member to serve as mentor to an incoming member.

And arguably the most critical task for the board, it says, is to select, hire, support, evaluate and, if needed, replace the president or executive director.

“Only a high level of board performance can create and sustain the energizing, inspiring and motivating environment in which the organization and its constituencies can excel,” the paper says.

The biggest impact on improving a board, it says, may be rooted in “cultural forces inside the board and organization.”

The most important of those forces is “trust among the board members, the chair and the senior staff,” it says.

Beneficial outcomes of that trust, it says, include “elimination of functional silos and narrow mindsets that can result in turf battles or in refusal to become involved outside the well-defined limits of a particular committee function,” it says.

Trust, recruiting, metrics

The “climate of trust must be created from the top,” it says, “with the board chair serving as the role model and this behavior as the template for committee chairs and committee members.”

Recruitment also is critical for creating a board that can excel, the paper says.

“Effective board members need not be heroic leaders or deep visionary thinkers,” it says, “but they must be thoughtful and authentic individuals who can inspire by example and motivate others in a non-threatening way.”

Also essential for successful boards is creating a “measurement system for the board that is comprehensible, relatively simple and not susceptible to manipulation,” the paper says.

Boards need “reasonably objective methods of assessing their own accomplishments, recognizing areas for improvement and development appropriate action plans,” it says.

So a board should try on a regular basis to “obtain a comparatively objective set of measurements by which it can judge its success against the goals it has set for the organization and itself,” it says.

‘Cultural attributes’

“Excellent boards are built on a clear understanding of their duties as fiduciary and governing bodies” of nonprofits, the paper says.

With that foundation, it says, a board “is positioned for maximum effectiveness when it can benefit from strong leadership by the chair, a properly structured committee system, engaged and committed board members and a sound relationship with senior staff members,” particularly the president or executive director.

“Cultural attributes such as leadership, trust, transparency and candor,” the paper says, “are an essential adhesive that binds the board together and constitutes the indispensable ingredient in the formulate for success.”

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

Fundraising emerging as ‘strategic’ asset

To survive and thrive, nonprofits need to move beyond treating fundraising as a “tactical” resource and treat it as a “strategic” asset that is core to their operations and organization, a new white paper says.

“With market returns uncertain and spending restraint difficult, the moderate but measurable increase in donations in the last year invites institutions to consider elevating fundraising to a more strategic position within the organizations,” says Essential Not Optional: A Strategic Approach to Fund-raising for Endowments, a white paper from the Commonfund Institute.

“No longer optional, an effective fundraising program, consistently implemented, can become a central pillar of support for the institution,” says the paper, written by John S. Griswold, executive director of the Commonfund Institute, and Bill Jarvis, its managing  director.

After their collapse four years ago, the capital markets recovered slightly but “have not shown clear direction,” and many investors doubt they are likely soon to “resume the double-digit pace that characterized the pre-crisis period,” the paper says.

And while overall giving has shown “subdued growth,” it says, the current period is one of the most favorable ever for endowment fundraising.

But successful fundraising is “invariably the fruit of a building process that takes time, resources and institutional commitment,” it says.

Fundraising campaigns have become “permanent” efforts, “always running in the background, with continuous cultivation of major gift prospects and a prioritized list of defined projects at the ready for negotiation with donors,” the paper says.

And nonprofits have moved to a strategic or “core” fundraising model that “focused on providing endowed support for the core mission of the institution and for a specific number of areas that have the potential to make a major difference in the institution’s future.”

Key to permanent campaigns is the idea that the “relationship between the donor and the institution has also changed and become more strategic,” the paper says, citing a fundraising professional who says asking for money “just alienates today’s donors.”

Fundraisers should be asking donors “how they want to change the world,” the fundraiser says.

And while the “intersection between donor interests and institutional imperatives may not always be obvious,” the paper says, “the strongest relationships seem to be forged from these conversations — or negotiations — that compel the parties to find common ground.”

Donors themselves are changing, the paper says.

They tend to be self-made, “relatively skeptical of broad institutional claims,” “quite specific about their likes and dislikes,” and wanting to “compare the performance of the institution’s existing endowment with their own wealth-creation capabilities when deciding to make a gift.”

Donors in short connect “development success and institutional competence in financial management,” the paper says.

“Institutions with strong missions but weak financial management will receive annual gifts,” it says, “while those with strong missions and strong financial management will be considered for endowed gifts.”

Corresponding to the increased focus on donor interests has been a shortage of unrestricted endowment gifts, the papers says, with the emphasis on new programs and buildings tending to “overshadow the question of how ongoing expenses are to be met.”

That issue has become a “source of anxiety: for institutional leaders, particularly at institutions that lack unrestricted endowment and cannot accumulate free cash flow” through operating surpluses or other sources of revenue, the paper says.

More wealth is being concentrated among fewer donors, it says, with 2 percent of donors at some leading institutions contributing 98 percent of funds, compared to the historical pattern typical at many institutions that saw 20 percent of donors contributing 80 percent of the funds raised.

“This lopsided ration means that, while a broad base of donors is desirable for many reasons,” the paper says, “development efforts are increasingly focused on identifying and grooming those doors who have the capacity to make a significant contribution.”

So building “permanent professional development departments,” which “rarely existed, even at large institutions,” the paper says, has become “an investment, not an expense.”

In addition to “grooming” donors for contributions to the permanent campaign, it says, development staff also “seek to understand the receptivity of donors to planned giving opportunities and to assess the likelihood that they will leave bequests.”

Todd Cohen

Charities post investment losses after two strong years

Investment returns for foundations and operating charities fell slightly in fiscal 2011 after posting double-digit growth each of the previous two years, two new studies say.

Grantmaking and gifts to charities were mixed, say the 2012 Commonfund Benchmark studies of foundations and of operating charities.

The 179 independent/private and community foundations, with a combined total of $100.4 billion in assets, posted an average total net loss in fiscal 2011 of 0.9 percent, net of fees, compared to gains of 12.5 percent in fiscal 2010 and 20.9 percent in fiscal 2009.

The 68 operating charities surveyed, with a combined $24.2 billion in assets, posted an average net loss of 1.8 percent on investment funds, compared to  gains of 11.6 percent in fsical  2010 and 21.5 percent in fiscal 2009.

The 2011 results marked the first time since fiscal 2008 that foundations and operating charities reported negative returns.

“2011 was a frustrating year for foundations and operating charities,” John S. Griswold, executive director of the Commonfund Institute, which sponsors the studies, says in a statement. “On top of the negative investment returns, the addition of inflation and investment-management costs means that these institutions fell a little farther behind financially, even before spending for mission support.”

Participating foundations posted an average three-year return of 10.5 percent, compared to a loss of 0.3 percent in 2010, reflecting the fact that the average loss of 26.5 percent for fiscal 2008, the year the capital markets collapsed, no longer was part of the calculation.

But the five-year net return fell to 1.5 percent from 4.2 percent a year ago, while the 10-year average annual return totaled 5.2 percent, down only slightly from 5.1 percent.

For operating charities, three-year returns averaged 10 percent last year, up from 0.1 percent a year earlier, while five-year returns averaged 1.8 percent, down from 4.7 percent last year, and 10-year returns averaged 5.5 percent, up from 4.9 percent last year.

Fifty percent of foundations surveyed reported higher spending in dollars in fiscal 2011, up from 38 percent in 2010, with just 25 percent reporting spending fewer dollars, down from 43 percent in fiscal 2010, and 13 percent reporting no change.

Among operating charities, 30 percent reported spending more dollars in 2011, up from 25 percent in 2010, while 35 percent reported spending fewer dollars, down from 49 percent in 2010, and 22 percent reporting no change, up from 19 percent in 2010.

Twenty-six percent of operating charities surveyed reported an increase in gifts received in 2011, up from 10 percent that reported an increase in 2010, while just 12 percent reported a decline in 2011, down from 17 percent in 2010, with 49 percent reporting no change.

Independent/private foundations reported average net investment losses of 0.7 percent, while community foundations reported average net losses of 1.4 percent.

The highest return for foundations, 5.7 percent, came from fixed-income assets, while the lowest, a loss of 12.2 percent, came from international equities.

The average annual effective spending rate for participating foundations was 5.5 percent, down from 5.8 percent in 2010, while the average debt load fell to $47.3 million from $67.4 million.

Among operating charities, cultural and religious organiztions averaged a loss of 1.8 percent, while social-service organizations averaged a loss of 1.9 percent.

Fixed-income assets produced the highest return for operating charities, an average gain of 5.2 percent, while the lowest, a loss of 10.1 percent, came from international equities.

Todd Cohen