Returns on Foundation Investment Dived In 2018

Private and community foundations had negative returns on investments during 2018 (-3.5 percent) compared to double-digit gains (15 percent) in 2017. According to new data from the 2018 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations® (CCSF), community foundations participating in the study reported an average negative return of 5.3 percent for 2018 compared with a gain of 15.1 percent for 2017.

The best return on investment for the foundations was in venture capital — 9.6 percent for community foundations and 13.3 percent for private foundation.

Last year represented the third time during the past 10 years that CCSF participants have reported flat to negative annual returns. The previous year represented the third time during the same period that average participant returns exceeded 15 percent. It was 2008 — when returns were impacted by the financial crisis and great recession – that losses exceeded 25 percent for both private and community foundations.

Compared with the previous year, the effective spending rate in 2018 was unchanged for private foundations while declining moderately for community foundations. The rate remained level at 5.7 percent for private foundations but eased to 4.6 percent from 4.8 percent for community foundations.

With financial markets uncertain and the impact on charitable giving of the Tax Cuts and Jobs Act of 2017 still inconclusive, gift-giving was mixed in 2018. Some 55 percent of community foundations reported an increase in gifts and donations, up from 49 percent a year ago. Meanwhile 36 percent reported a decrease, up sharply from 22 percent the previous year.

“Financial markets were choppy in 2018, at times performing well but at others — particularly the fourth quarter — they reflected a range of investor concerns. It was the uncertain environment that ultimately produced negative returns for many portfolios,” said Mark Anson, president and CEO of Commonfund via a statement. Anson continued: “If there was an encouraging sign for participating foundations, it was the increase in trailing 10-year returns to an average of 8.4 percent for private foundations and 8.2 percent for community foundations. These compare to last year’s trailing 10-year returns of 5.5 percent and 5.3 percent, respectively.”

The higher returns, in excess of 8 percent, are needed to maintain the corpus of foundations’ endowments after spending, inflation and costs, according to Anson.

Kathleen P. Enright, president and CEO of the Council of Foundations (CoF), added that all nonprofit organization “need to embrace the best financial stewardship practices in order to create sustainable organizations that can fulfill their missions over the long term.”

Anson cautioned that while dropping the poor 2008 returns boosted 10-year returns, more recent three- and five-year returns were both lower compared with 2017, owing to negative returns in 2015 and 2018.

Venture capital generated a 13.3 percent return for private foundations and a 9.6 return for community foundations. Private equity (leveraged buyouts, mezzanine, M&A funds and non-U.S. private equity) produced a 9.5 percent return for private foundations and a 10.6 percent gain for their community counterparts.

Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives) — historically foundations’ largest single alternative strategies allocation — returned -2.1 percent for private foundations and -2.5 percent for community foundations. Private equity real estate and distressed were also sources of returns in the range of 4.2 percent to 6.4 percent. Commodities and managed futures were weak, however, returning -8.9 percent for private foundations and -6.1 percent for community foundations.

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