Investment Returns Pop, But Don’t Keep Up
July 14, 2017 Mark Hrywna
Private and community foundations saw their highest average returns in three years but spending rates also jumped, staying ahead of 10-year returns.
Community foundations reported an average return on investments of 7.3 percent while private foundations reported an average of 6.4 percent, according to the 2016 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF).
In 2015, private foundations reported an average return of 0.0 percent and community foundations reported an average -1.8 percent, a year after returns were 6.1 percent and 4.8 percent, respectively.
Released today, the survey covers the fiscal year from January to December 2016 and return data are reported net of fees. More than 200 foundations participate in the survey, representing combined assets of more than $96 billion. It’s the fifth year that Commonfund Institute and the Council on Foundations have partnered to produce the research, believed to be the most comprehensive annual survey of its kind.
Returns saw a complete turnaround in each major asset class from the previous year, when all were negative or zero. U.S. equities generated the highest return for private and community foundations, in the neighborhood of 12 percent, followed by:
- Short-term securities/cash/other, 3.8 percent and 3.7 percent, respectively;
- Alternative strategies, 5.6 percent and 5.1 percent;
- Non-U.S. equities, 4.8 percent and 4.1 percent; and,
- Fixed income, 0.8 percent and 0.3 percent.
Asset allocations for both types of foundations remained remarkably stable from year to year, with virtually no change at the level of the five major allocation classes. Private foundations generally averaged 45 percent in alternatives and a quarter of assets in U.S. equities, about 19 percent in non-U.S. equities, followed by 8 percent in fixed income and 4 percent in short-term securities/cash/other. Community foundations held a third of assets in U.S. equities, a quarter in alternative strategies, and 22 percent in non-U.S. equities. Fixed income saw a mild shift from 16 percent to 14 percent allocation, with the difference going into short-term securities/cash/other.
“Investment returns for 2016 are encouraging, but deliver a mixed message: It is heartening to see improved investment performance, especially given its implications for ongoing mission support,” Council on Foundations President and CEO Vikki Spruill and Commonfund Institute Executive Director William Jarvis said in a joint statement. Long-term returns are not sufficient to maintain the principal of foundations’ endowments after spending, inflation and costs, they added.
Ten-year returns averaged 4.7 percent for private foundations and 4.6 percent for community foundations, trailing reported effective spending rates. Spending rates among participating private foundations in 2016 rose to 5.8 percent, up from 5.4 percent the previous year, while community foundations reported a decline from 4.8 percent to 4.7 percent.
“Over the past 10 years, community foundations’ returns roughly equal their 2016 effective annual spending rate but do not offset the effect of inflation and costs. Private foundations’ 10-year investment returns are 1.1 percent lower than their 2016 effective spending rate, and, if continued, this could be a concern over the long term,” they said.
Sixty percent of private foundations with more than $500 million in assets reported increased spending in dollars, up from 50 percent last year. About 42 percent of community foundations of the same size increased spending in dollars compared to 50 percent in the previous year. Spending in dollar terms declined for private foundations in the other two size categories, rose for community foundations in the $101 million and $500 million range and was unchanged for those with assets of less than $101 million, year over year.
As returns have dropped in recent years, so have long-term expectations for some foundations. The average long-term objective among private foundations with assets of more than $500 million fell from 7.7 percent to 6.9 percent in 2015. Among private foundations within the same size category, none had a long-term objective of 9 percent or more in 2016 compare with 8 percent a year ago and 16 percent in 2014. No community foundations of that size report an objective of 9 percent or more in the past three years.