Private Foundation Investments Returned 15.6% in 2013

Returns on domestic equities far outpace other asset classes

Foundations with more than $500 million in assets returned 16.5% net of fees. Foundations with more than $500 million in assets returned 16.5% net of fees.

Private foundations’ investment returns rose to an average of 15.6% in 2013, according to a survey released Wednesday by the Council on Foundations and Commonfund Institute.

Survey data showed that foundations with more than $500 million in assets had the highest return, 16.5% net of fees. Organizations with assets between $101 million and $500 million had an average return of 15.5%, and smaller foundations had an average return of 15.2%.

According to the study, trailing three-year returns for participating foundations averaged 8.7%, compared with 2012’s 7.9%.

Trailing five-year returns jumped to 12% from 1.7%, as the abysmal 2008 return of -25.9% dropped out of the five-year calculation.  For the trailing 10-year period, returns averaged 6.9% compared with last year’s 7.9%.

The 2013 Council on Foundations-Commonfund Study of Investments for Private Foundations was based on data from 153 private foundations with assets of $94.1 billion.

Individuals at these institutions most knowledgeable about investment matters participated in the survey through Web-enabled questionnaires and field interviews during the first and second calendar quarters of 2014.

“This report contains good news for the country,” the leaders of the Council on Foundations and Commonfund Institute said in a joint statement. “With double-digit returns for the second year in a row, private foundations have regained solid financial footing positioning them well for community investment.”

The statement noted that an average of 56% of participating foundations reported an increase in mission-related spending, up from 47% a year ago, and only 26% reported a decrease, down from last year’s 32%.

“As communities continue to recover, they look to government, businesses and the philanthropic sector to help them find solutions. As foundation assets continue to rebound, they have more resources to invest in programs that advance the common good.”

Domestic Equities Ascendant

In fiscal 2013, domestic equities produced the highest return by far for foundations — an average of 31.8%, double the 15.9% return reported for investments in international equities, according to the study.

Alternative strategies generated a 7.3% return, while short-term securities/cash/other returned 0.1%.

Fixed income was down 0.7% in fiscal 2013 as the gradual withdrawal of market support by central banks caused historically low interest rates to rise and bond prices to fall.

Within the broad category of alternative strategies, distressed debt came out on top for the second consecutive year, at 24.4%, followed by venture capital at 14.2%.

Marketable alternative strategies — including hedge funds, absolute return, market neutral, long/short, 130/30, event driven and derivatives — reported a 12.6% advance.

Private equity returned 11.4%, and non-campus private equity real estate returned 9.4%.

Energy and natural resources were up 4.9% in 2013, while commodities and managed futures were down 8.3% for the year.

On December 31, participating foundations had the following asset allocations, with comparable FY2012 allocations in parentheses:

  • Domestic equities: 24% (26%)
  • Fixed income: 9% (11%)
  • International equities: 20% (16%)
  • Alternative strategies: 42% (42%)
  • Short-term securities/cash/other: 5% (5%)

Resources, Management and Governance

The survey found that the number of full-time professional private foundation staff devoted to investments averaged 1.3 full-time equivalents last year, a decline from the fiscal 2012 average of 1.4 and 1.5 in fiscal 2011.

Twenty-five percent of study participants reported having a chief investment officer, a figure that rose to 58% among the largest participating foundations.

Seventy-three percent of foundations reported using a consultant, compared with 80% a year ago.

Thirty percent of respondents said they had substantially outsourced their investment function, down from last year’s 38%.

Ninety-five percent of participating foundations reported that they had a conflict-of-interest policy.

The average number of voting members on participating foundations’ investment committees was 5.5, up from 5.4 reported for the two previous years.

The average number of investment committee members who were investment professionals was 2.4, down from 2.5 last year, while investment committee members with alternative strategies experience stood at 1.6, down from 1.7 reported for the last two years.

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