Big private foundations and their boldface founders are movers and shakers in the philanthropy world, but 98% of the 84,000 private foundations in the U.S. have less than $50 million in assets and rarely make the news beyond their localities.
Foundation Source, which provides support services to private foundations, has turned the spotlight on these smaller organizations with a report, released Friday, that examines the portfolios, performance and preferences of smaller foundations.
The report details their resurgence from the bottom of the recession in 2008: asset balances grew from $700 million in 2008 to more than $1 billion in 2013. The report also suggests that advisors to these small foundations can play a key role in their growth, particularly in three areas.
Foundation Source based its findings on the actual investment holdings, asset balances and expenses of 238 of its more than 1,200 clients. Ninety-six of foundations studied had assets of less than $1 million, 115 had assets between $1 million and $10 million and 27 had more than $10 million in assets.
Strong Recovery; Allocating to Equities
According to the report, the asset levels of the 238 foundations have increased 48% since 2008, from $700 million to more than $1 billion in 2013, an increase of $334 million. Growth was especially strong in 2013, when foundations experienced a total gain of $118 million.
The report said foundations in the $1 million to $10 million asset range and those with assets between $10 million and $50 million enjoyed steady and robust endowment gains, while smaller foundations remained flat.
Why the disparity? “In our experience, smaller foundations distribute a greater percentage of their assets—on average above 20% of their assets—than their larger counterparts,” Page Snow, chief philanthropic and marketing officer at Foundation Source, said in a statement.
The report found that equities played a leading role in asset growth after 2008 as foundations in the study increased their equity holdings and reduced their percentage of holdings in cash.
In 2008, the foundations allocated 42.4% of their assets to equities; by 2013, that percentage had increased to 55.5%. Over the same period, cash holdings shrank from 20.5% to 12.8%.
Fixed-income allocations were relatively stable throughout the five-year period, as were alternative assets.
Foundation Source said the combination of low interest rates and strong equity performance suggested that foundation managers had periodically rebalanced their portfolios.
Following the recession, foundations paid lower investment fees, the report found. In 2008, 19% of foundations were paying between 100 and 150 basis points, but in 2013, only 6% paid fees at that level.
Over the same six-year period, the number of foundations paying less than 50 basis points grew from 34% to 55%.
As part of its report, Foundation Source surveyed 190 of its small foundation clients regarding their perceptions of their investments and advisors.
Overall, 93.7% of clients said they were either “highly” or “mostly” positive about their foundation’s performance, and 97.4% felt that way about their relationships with advisors. These findings were likely bolstered by the market recovery, the report noted.
The survey identified three key areas where advisors might add additional value to client relationships.
For one, advisors can create an investment policy. Sixty-five percent of foundation respondents said they lacked a written investment policy statement.
Of those that did have such a policy, 36.9% said they had updated it within the last year.
Second, advisors can also engage the next generation. Thirty-eight percent of respondents said it was “somewhat important” for advisors to do this, while 22.3% said it was “critically” important to do so.
Despite their apparent interest, only 46% of respondents said their investment advisor had interacted with the next generation.
Third, advisors to foundations can also get serious about impact investing. Although 60% said advice on social impact or mission-related investments was “not at all important,” fully one third of respondents said such advice was either “somewhat” or “critically” important.
“Private foundation donors clearly value and maintain their relationships with financial advisors,” William Sutton, head of U.S. philanthropic services at UBS, said in the statement.
“Nevertheless,” he continued, “in a competitive marketplace, it’s essential that advisors bring added value to the client relationship where and whenever possible.” The Foundation Source report on private foundation investing provides, Sutton said, “a host of valuable findings for the advisor community, grounded by survey data from an audience that can be difficult to reach.”