2017 Foundation Investments Returned Double Digits
August 9, 2018 Mark Hrywna
Average investment returns for private and community foundations last year reached their highest levels in four years, buoyed by a strong equities market both domestically and abroad. Average investment returns soared to 15 percent for 2017, roughly twice as high as 2016 and significantly better than the flat returns experienced two years ago.
The 2017 Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF), released today, covers the 2017 calendar year. The 224 foundations in the study (143 private and 81 community) accounted for endowment assets of $104.4 billion.
Private foundations grabbed 2017 returns of 15 percent after 6.4 percent in 2016 and 0.0 percent in 2015. Community foundations reported returns of 15.1 percent, up from 7.3 percent in 2016 and a decline of 1.8 percent in 2015. All return data are reported net of fees.
The 2017 averages were the highest since 2013 when private foundations reported an average 15.6 percent and community foundations an average 15.2 percent.
Private foundations returned:
- One-year, 15 percent
- Three-year, 7 percent
- Five-year, 8.6 percent
- 10-year, 5.5 percent
Community foundations returned:
- One-year, 15.1 percent
- Three-year, 6.8 percent
- Five-year, 7.9 percent
- 10-year, 5.3 percent
The effective spending rate in 2017 rose to 4.8 percent, up from 4.7 percent the previous year, for community foundations. Private foundations also had a 0.1 percent change in effective spending rate but in the other direction: down from 5.8 percent in 2016 to 5.7 percent in 2017.
Approximately 57 percent of private foundations and 56 percent of community foundations increased spending in dollar terms, by 6.8 percent and 8.7 percent, respectively.
Almost half of participating community foundations (49 percent) reported that gifts and donations rose last year, up from about one-third (34 percent) reporting greater gifts in 2016. More than one in five community foundations (22 percent) reported a decline in gifts, about half as many that reported a decline in 2016 (40 percent).
Asset allocations remained largely stable for both community and private foundations. “We see that as a good sign that investment committees and staff are adhering to investment policies,” said Cathleen Rittereiser, executive director of Commonfund Institute in Wilton, Conn.
Rittereiser said focusing on just 100 basis points a year will increase the odds of consistent, long-term returns to meet purchasing needs of foundations in the future. “The ways to do that, looking at your investment policy statement, your asset allocation and looking at your spending policy,” she said.
Asset allocations don’t change a lot year-to-year, said Deborah Spalding, deputy chief investment officer and managing director of Commonfund. Private foundations tend to resemble large university endowments, which means they tend to have a little more diversification and more exposure to alternative strategies, she added. Community foundations outperformed in 2017 compared to 2016 because they have a higher allocation to U.S. and non-U.S. equity markets, according to Spalding. Among alternative strategies, private equity had the highest returns, at 10 percent for private foundations and 11.1 percent among community foundations.
Going forward, Spalding believes economic growth will continue as well as growth in corporate earnings. The strength of that provides a backdrop for a continued strong equity market, however, there are high valuations in the private market. Strong returns in the past might not be so easily repeated going forward, she said, as interest rates beginning to rise could cool the economy although she doesn’t see that as problematic at this point. On the margins, the market might be more volatile as a result of increasing trends of possible trade wars and more nationalistic policies across the globe.
“We still believe in the endowment model, that includes having a bias in equities. High allocation to equities will be key to purchasing power going forward,” Spalding said. She also noted an increase in the use of ESG (environmental, social and governance) among foundations. “We’ve seen this increase bubbling up over time,” Spalding said and expects to see it continue into the future.