For the third time in four years, community foundations enjoyed double-digit returns as they continued to turn more toward international equities and alternative investments, according to an annual survey by the Council on Foundations (COF).
The median return of 13.2 percent for 2006 pushed the five-year return to better than 8 percent per year. The five-year return — as well as the median seven-year return of 5.3 percent yearly — is dragged down by weaker numbers in 2000, 2001, and 2002, the worst year in the survey’s history (10.6 percent).
The COF’s 2006 Investment Performance Practices of Community Foundations yielded a record 199 responses, up from the previous record of 169 responses two years earlier. The responses represent 46 percent of the community foundation universe with assets of $5 million or more and 65 percent of those with assets of $25 million or more. COF has sponsored the investment survey, a "standardized, qualitative look at the field’s investment performance, asset allocation, and investment management practices," for the past 16 years.
"The report reflects the prudent investment choices of community foundations," said Steve Gunderson, president and CEO of the Washington, D.C.-based nonprofit membership association of more than 2,000 foundations and corporations, with assets totaling more than $282 billion. "Their strength and ingenuity have put them in financial positions that better serve their communities."
The median 15-year annualized return for all participating community foundations (before deduction of investment fees) was 9.3 percent, with individual participant returns ranging from 6.6 percent to 11.1 percent.
Where do community foundations invest? At the end of last year, about 61.3 percent of total community foundation assets were invested in equities, 21.5 percent in fixed income, 13.7 percent in alternative strategies and 3.5 percent in cash. Historically, the percentage devoted to equities has remained above 60 percent, peaking at 69 percent in 1999.
More than ever, foundations are looking overseas and alternative investments. During the past 10 years, the percentage of investments in international equities has risen from just over 6 percent of total portfolio assets to more than 16 percent. Alternative investment strategies (hedge funds, private equity, real estate, real assets, etc.) have reached their highest level in the survey’s 16-year history, led by hedge funds.
Exposure to alternative assets rose from just less than 1 percent in 1999 to almost 14 percent in 2006. (Prior to 2000, hedge funds, private equity and real assets were included in "other" assets within the survey). The percentage of community foundations with an allocation to hedge funds has almost doubled since 2002, from 26 percent to 49 percent last year.
Looking at the survey historically, the increase in exposure to alternative assets has been diverted from fixed income bonds, and sometimes cash or equities. Ten years ago, fixed income tied up almost a third of community foundation assets and last year was down to below 22 percent.
*** This article is from NPT Weekly, a publication of The NonProfit Times.
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