As more foundations tempered their long-term return expectations last year, investment returns declined for the second consecutive year in 2015, with a 1.8-percent decline for community foundations and flat returns for private foundations, neither of which kept pace with the S&P 500’s 1.4-percent return.
Private foundations generally reported better returns than community foundations, last year reporting an average return of zero percent, down from 6.1 percent in the previous year. Community foundations reported a return of -1.8 percent, down from 4.8 percent, in Fiscal Year Ending 2014. Private foundations had reported an average return of 15.6 percent for Fiscal Year 2013 compared with 15.2 percent for community foundations. All return data are reported net of fees.
Released this morning, the 2015 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF) represents combined assets of almost $101 billion for 228 participating foundations. The study boasts a participation rate of 83 percent.
“The last couple of years, the markets have turned from very favorable to one that’s looking darker and dark for institutions that have to make grants,” Commonfund Institute Executive Director William Jarvis said during a conference call announcing the results. “We live in an era of not simply volatility but radical discontinuities: Periods of positive return punctuated in some cases by catastrophic losses to periods like now, of relative underperformance. This puts tremendous stress on grantmaking necessities,” he said.
The S&P 500 tends to be a bellwether in most portfolios, said Mark Anson, chief investment officer at CommonFund Institute in Wilton, Conn. On a price basis, the S&P actually declined 1 percent last year but managed a positive return of 1.3 percent, as a result of dividend yields of 2 to 4 percent. “We’re all rowing upstream with shorter oars, so to speak,” he said.
“It’s clear that bonds are no longer driven by yield,” Anson said. They used to be a source of income and cash but with government bonds in Europe going negative, he said bonds have turned into the new insurance policies and high-dividend stocks are the new bonds. Yet there doesn’t seem to be a lot of panic, only recalibrating of portfolios to a lower return environment.
To outperform, fiduciaries have to go further afield, seeking increasingly complex portfolios for diversification as well as for returns.
Two years of low investment results have reduced foundations’ trailing 10-year returns to the 5.1 and 5.9 percent range. The effective spending rate remained unchanged at an average of 5.1 percent for all foundations.
Returns for both foundation types were lower compared to last year among the five primary asset classes reported in the study (domestic equities, fixed income, international equities, alternative strategies, and short-term securities/cash/other).
For the second consecutive year, international equities produced the lowest return, -4.5 percent for private foundations and -5.1 percent for community foundations. Returns on domestic equities swung from positive into negative territory, from 10.4 percent to -0.8 percent for private foundations and from 9.8 percent to -0.7 percent for community foundations.
In 2014, international equities was the only asset class to see negative returns but last year, only short-term securities/cash/other managed to be flat.
Based on size, the largest private foundations (more than $500 million in assets) generated an average return of 1.1 percent. Only private foundations less than $101 million managed to eke out a positive return (0.1 percent); all other foundations by size had a negative return, with the largest (-1.8 percent) being community foundations less than $101 million.
Private foundations typically net higher returns than community foundations but the difference during the past decade has shrunk. Ten-year returns for private foundations were calculated at 5.5 percent compared with 5.2 percent for community foundations; five-year returns were reported at 6.3 percent and 5.7 percent, for private and community foundations, respectively, and three-year returns as 6.9 percent and 5.7 percent, respectively.
By asset size and type, three-year returns ranged from 5.6 percent to 7.8 percent; five-year returns ranged from 5.4 percent to 7 percent, and 10-year returns ranged from 5 to 5.8 percent.
“Foundation fiduciaries appear to be adapting to the potential for a lower return environment by moderating their long-term return expectations,” according to the statement. The largest private foundations slashed their long-term return objective in half last year, from 16 percent in 2014 to 8 percent. Among community foundations of the same size ($500 million or more), 25 percent targeted a long-term return of 8 to 8.9 percent in 2015 compared with 36 percent in the previous year.
The shift was even greater among smaller community foundations (assets of less than $101 million), with 27 percent aiming for that goal versus 41 percent in 2014.
The only asset classes to have positive returns for both private and community foundations last year were found within alternative strategies. For community foundations, it was private equity, 3.8 percent, and private equity real estate, 6.8 percent. At the same time, energy and natural resources (also in alternatives) saw the worst returns, -7.5 percent. For private foundations, it was venture capital, 16.7 percent; private equity real estate, 12.7 percent, private equity, 8.8 percent, and distressed debt, 5.1 percent. The sample size of venture capital for community foundations was to small for analysis, according to the study.