September 30, 2013

Private Foundation Assets Rebound From Recession

Study finds domestic and international equities biggest contributors to 2012 gains

Private foundation endowments returned an average of 12% (net of fees) for the January to December 2012 fiscal year, according to a new study by the Council on Foundations and Commonfund Institute.

The return was a significant improvement over the FY2011 loss of 0.7%.

The study comprised 140 foundations, representing $79 billion in assets.

Foundations with assets between $101 million and $500 million produced the highest return, 12.4%. Organizations with more than $500 million in assets realized an average return of 11.9%, while those with less than $101 million produced an average return of 11.4%.

The study showed that trailing three-year returns for participating foundations averaged 7.9% in 2012, compared with 10.3% in 2011. The decline was the result of 2009’s strong returns being dropped from the three-year calculation.

Trailing five-year returns averaged 1.8%, versus 1.4% in the prior year, reflecting the continuing inclusion of FY2008’s losses in the five-year number. For the trailing 10-year period, returns averaged 7.9%, compared with last year’s 5.2%, as the losses from FY2002 were now no longer included.

“After a mildly negative 2011, private foundations secured double-digit gains in 2012, restoring much needed growth to their endowments,” John Griswold, Commonfund Institute’s executive director, said in a statement.

“Even more heartening is the higher 10-year return, an average of almost 8%. Last year’s 10-year return, in the 5% range, was simply not high enough to sustain spending levels once inflation and investment management costs are taken into account.”

Domestic and international equities were the greatest contributors to FY2012’s 12% return, the latter leading all asset classes with a 17.5% gain and the former close behind at 16.3%. Fixed income returned 7.1%, alternative strategies 7% and short-term securities/cash/other 1%.

Within the broad category of alternative strategies, distressed debt returned 14.7%, followed by an 8% gain from marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event driven and derivatives).

Private equity (leveraged buyouts, mezzanine and mergers and acquisitions funds, and international private equity) returned 7.7%, followed by private equity real estate (noncampus), at 6.7%; venture capital, at 6.5%; energy and natural resources, at 4.6%; and commodities and managed futures, at 1.3%.

Among all participating foundations, 34% reported an increase in their effective spending rate (derived by dividing the amount spent on mission by the market value of the foundation at the beginning of the year), 22% reported a decrease and 14% reported no change. Thirty percent gave no answer or were uncertain.

Foundations continued the deleveraging trend of recent years. For fiscal 2012, the 13 foundations that reported carrying debt had an average debt level of $47 million, versus $54 million in fiscal 2011. Median debt, however, rose to nearly $15 million in fiscal 2012 from $14 million in fiscal 2011. The number of full-time professional private foundation staff members devoted to investments averaged 1.4 full-time equivalents, down from last year’s average of 1.5 FTEs. Twenty-three percent of study participants reported having a chief investment officer, a figure that rose to 72% among the largest participating foundations with at least $500 million in assets.

Eighty percent reported using a consultant, compared with 76% a year ago. Thirty-eight percent said they had substantially outsourced their investment function, up from last year’s 30% that did.

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