Foundation investment returns drop

By Ret Boney

U.S. foundations reported an average return on assets of 8.1 percent during fiscal year 2005, the second straight year of diminishing returns, a new study says.

Given an estimated 3 percent inflation for the sector, and a federally-mandated annual payout of 5 percent, that return doesn’t meet minimum requirements for growth, says John Griswold, executive director of the Commonfund Institute, which compiled the report.

“That barely covers your nut, especially if you’re including your costs,” he says.  “We’re already underwater a bit, and we don’t see that improving in the near term.”

Last year’s performance compares to average returns of 11.4 percent in 2004 and 17.8 percent in 2003, says the report, “Commonfund Benchmarks Study – Foundations and Operating Charities 2006.”

And given the performance of the domestic and foreign markets so far in 2006, Griswold says, a “rockier road” could be in store this year.

“The word is prudence,” he says. “You have to be careful about what you’re planning to spend, and you have to plan to diversify your portfolio, which these foundations are doing, and that’s a good thing.”

The largest 10 percent of foundations reported the highest return, at 15.5 percent, the report says, while all other size groups posted returns averaging from 7.4 percent to 8.4 percent.

The study of 334 foundations says operating charities fared best, with an average return of 8.9 percent last year, compared to 8.2 percent for independent and private groups and 6.9 percent for community foundations.

Overall, foundations lowered their dependence on domestic equities and increased their reliance on domestic bonds, international stocks and alternative investment strategies.

Allocations to domestic equities fell to 37 percent last year from 45 percent in 2004 and, within that category, investments in large-company stocks decreased to 50 percent from 59 percent, the study says.

Investment in fixed-income was virtually unchanged at about 19 percent, while international equities rose to 18 percent last year from 14 percent in 2004, and cash and short-term investments doubled to 6 percent from 3 percent.

The largest 10 percent of foundations relied more heavily on alternative investing strategies last year, investing 29 percent compared to 20 percent for foundations overall.

The largest foundations also invested 22 percent in international stocks in 2005, compared to 18 percent for foundations overall.

Payout rates for foundations, which by law must spend at least 5 percent of their assets each year, dropped from 5.8 percent in 2005 to 5.5 percent last year, the lowest rate in four years.

Community foundations reported the highest payout rate of 6.4 percent, the study says.

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