Private and community foundations reported investment returns of 6.4% and 7.3% for fiscal year 2016, ended Dec. 31, according to data gathered by the Commonfund and the Council on Foundations.
Both returns were higher than those reported in fiscal 2015: 0.0% for private foundations and -1.8% for community foundations. Returns were lower in fiscal 2014 as well: 6.1% and 4.8%.
Private foundations’ effective spending rate in fiscal 2016 rose to 5.8% from 5.4% the previous year, while that of community foundations dipped to 4.7% from 4.8% in fiscal 2015.
“Investment returns for 2016 are encouraging, but deliver a mixed message,” the leaders of the Council on Foundations and the Commonfund, Vikki Spruill and William Jarvis, said in a joint statement.
“It is heartening to see improved investment performance, especially given its implications for ongoing mission support. But with trailing 10-year returns averaging 4.7% for participating private foundations and 4.6% for community foundations, long-term returns are not sufficient to maintain the corpus of foundations’ endowments after spending, inflation and costs.”
Spruill and Jarvis said community foundations’ returns just about equaled their 2016 effective annual spending rate, but did not offset the effects of costs and inflation.
As for private foundations, their 10-year investment returns were 110 basis points lower than their 2016 effective spending rate. “If continued,” Spruill and Jarvis said, “this could be a concern over the long term.”
According to the study, foundation fiduciaries appear to be adapting to the potential for a lower return environment by moderating their long-term return expectations.
The average long-term investment objective among the largest private foundations fell to 6.9% from 7.7% in 2015, while among similarly sized community foundations it remained steady at 7.1%.
The study was based on data collected from 123 private foundations and 80 community foundations, with combined assets of $96.3 billion. The organizations were segmented by the size of their endowment assets: more than $500 million, between $101 million and $500 million, and less than $101 million.
In 2015, return data were negative or zero for each of the major asset classes included in the study. This year, all were positive:
- U.S. equities — 11.8%, private foundations; 12.4%, community foundations
- Alternative strategies — 5.6%, private foundations; 5.1%, community foundations
- Non-U.S. equities — 4.8%, private foundations; 4.1%, community foundations
- Fixed income — 3.8%, private foundations; 3.7%, community foundations
- Short-term securities/cash — 0.8%, private foundations; 0.3%, community foundations
Within the broad alternative assets category, energy and natural resources generated the strongest return at 12.9% for private foundations and 10.4% for community foundations, dramatically ahead of last year’s losses of 13.3% and 7.5%.
Commodities and managed futures swung around as well, returning 10% for private foundations, up from a 22.5% loss in 2015. (Last year, too few community foundations reported on this allocation for it to be statistically reliable.)
Generally, foundations’ largest alternatives allocation, marketable alternative strategies, went from negative in FY2015 to positive last year, returning 2.5% for private foundations and 3.4% for community foundations.
Private equity returned 6.9% among private foundations and 4.8% among their community counterparts, while venture capital produced lower returns this year, at 2.9% for the former and 1.9% for the latter.
The return on private equity real estate (non-campus) was also down from the year before, at 7.5% for private foundations and 6.3% for community foundations. And distressed debt returned 3.4% for private foundations and 1.5% for community foundations.
In a relatively low-volatility market environment, year-end asset allocations for both private and community foundations remained largely unchanged over the past two fiscal years.
Private foundations’ allocations in fiscal 2016 and 2015:
- U.S. equities: 24% and 24%
- Fixed income: 8% and 9%
- Non-U.S. equities: 19% and 18%
- Alternative strategies: 45% and 45%
- Short-term securities/cash/other: 4% and 4%
Community foundations’ allocations in fiscal 2016 and 2015:
- U.S. equities: 33% and 33%
- Fixed income: 14% and 16%
- Non-U.S. equities: 22% and 22%
- Alternative strategies: 25% and 25%
- Short-term securities/cash/other: 6% and 4%
In fiscal 2016, ended June 30, college and university endowment returns were negative, according to the latest NACUBO-Commonfund study.