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Portfolio > Alternative Investments > Private Equity

Foundations Adjusting to Lower Returns, for Now

By Michael S. Fischer

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For the second consecutive year, private and community foundations experienced lower investment returns in the 2015 fiscal year, the Council on Foundations and Commonfund Institute reported this week.

The effective spending rate for both foundations, however, remained unchanged from the previous year.

The 2015 fiscal year report comprised 228 foundations with combined assets of $101 billion. Participating foundations had endowment sizes ranging from less than $101 million to more than $500 million.

Private foundations reported an average return of 0% for the 2015 fiscal year (Jan. 1 to Dec. 31), down from 6.1% reported for fiscal 2014. Community foundations’ average annual return was down 1.8%, compared with a 4.8% gain for the previous fiscal year.

The effective spending rate averaged 5.1% for all participating foundations.

Spending in dollar terms rose in 2014. Across the three size cohorts, some 50% of private foundations reported increased spending in dollars, while 50% to 65% of community foundations did so.

“The message of this study is clear,” the leaders the Council on Foundations and Commonfund Institute Vikki Spruill and William Jarvis said in a joint statement.  “Foundations are continuing to invest in their missions and maintain consistent spending.”

Spruill and Jarvis noted, however, that the study raised the question what the long-term effect on endowment values would be if foundations did not experience better near- and midterm investment returns.

“Two years of low investment results have reduced foundations’ trailing 10-year returns to the 5.1% to 5.9% range,” they said. “Without higher long-term returns, it will be difficult for foundations to maintain their endowments once annual spending, inflation and investment management costs are taken into account.”

Adjusting to Lower Returns

Both types of foundations have realized lower investment returns for two years running, after reporting robust returns in fiscal 2013. That year, private foundations had an average return of 15.6% net of fees, while community foundations reported an average return of 15.2% for the same period.

Returns for both foundation types were lower in fiscal 2015, compared with the previous year.

International equities produced the lowest return last year, down 4.5% for private foundations and down 5.1% for community foundations.

Domestic equities swung sharply from positive to negative, down 0.8% for private foundations and down 0.7% for community ones from 10.4% and 9.8% in fiscal 2014.

Alternative strategies were down a little more than 2% for both foundation types, fixed income was down 0.3% and down 0.7% and short-term securities/cash/other were flat.

Within the broad category of alternative assets, venture capital generated the best return for private foundations, up 16.7%; the sample size for community foundations was too small for analysis, according to the report.

Private equity real estate (non-campus) returned 12.7% for private foundations and 6.8% for community foundations, while private equity produced returns of 8.8% and 3.8% for the two foundation types. The distressed debt allocation was also positive for private foundations, returning 5.1%.

Private foundations’ sharpest loss came from allocation to commodities and managed futures, down 22.5%. Marketable alternative strategies, comprising hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives, produced a loss of 1.4% for both private and community foundations.

Analyzed by size and type of participating foundation, the data showed that private foundations produced the higher average annual return across all size categories, 1.1%, compared with -1.5% for community foundations of the same size, according to the report.

The analysis found that the return gap between the two types of institutions diminished as the time period lengthened. For the trailing three-year period, private foundations returned an average of 6.9% and community foundations 5.7%; for the trailing five years, 6.3% and 5.7%.

For the trailing 10-year period, the spread narrowed to 30 basis points, with private foundations’ average return 5.5% and community foundations’ 5.2%.

The report noted that foundation fiduciaries seemed to be adapting to the potential for a lower returns by moderating long-term return expectations.

Among private foundations with more than $500 million in assets, 16% had a long-term return objective of 9% or more in fiscal 2014. This fell to 8% for fiscal 2015.

Likewise among similarly sized community foundations. In fiscal 2014, 36% targeted a long-term return of 8% to 8.9%, while 25% had a comparable target in fiscal 2015.

Among community foundations with assets below $101 million, the shift was greater. While 41% targeted a return of 8% to 8.9% in 2014, only 27% said they had that goal in the following fiscal year.

Asset Allocation

According to the report, private and community foundations’ asset allocations have been stable year after year, with almost no change at the level of the major allocation categories.

Following are the participating foundations’ asset allocations as of Dec. 31, followed by their comparable 2014 allocations:

  • Domestic equities: private — 24%/25%; community — 33%/34%
  • Fixed income: private — 9%/9%; community — 16%/15%
  • International equities: private — 18%/18%; community — 22%/22%
  • Alternative strategies: private — 45%/44%; community — 25%/25%
  • Short-term securities/cash/other: private — 4%/4%; community — 4%/4%

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