Foundation investment returns grow

By Ret Boney

Private and community foundations in the U.S. earned more on their investments in 2006 and expect the positive trend to continue in 2007, a new report says.

The strong showing is due in part to improved performance in the financial markets and a greater reliance on non-traditional investment options, says the 2007 Foundations Report of the Commonfund Benchmarks Study.

“This report shows a continuation of trends among foundation endowments to reduce allocations to domestic equities and fixed income and increase allocations to alternative investments and international equities,” says William Jarvis, managing director of the Commonfund Institute and managing editor of the Benchmark Study.

The average annual investment return for foundations overall was 13.7 percent last year, up from 7.9 percent in 2005, says the report, which analyzed the returns of 279 foundations with combined assets of $192 billion.

The largest foundations, those with endowment assets of $1 billion or more, performed better, earning 15.6 percent in 2006, while foundations with assets between $51 million and $100 million earned the least, 12.4 percent.

International equities was the best performing asset class overall, returning 25.1 percent, the report says, followed by energy and natural resources, which earned 17.6 percent last year.

The study’s 214 private and independent foundations saw an average annual return of 13.7 percent, barely topping the 13.6 percent posted by the 65 responding community foundations.

Further boosting performance, seven in 10 community foundation reported they received more in donations and gifts last year than in 2005.

The trend in recent years away from more traditional asset classes in favor of alternative ones was a driver in the overall improvement in returns, the study says.

Allocations to domestic equities continued to drop, to 33 percent in 2006 from 36 percent the year before, and fixed income allocations fell to 16 percent from 18 percent, the study says.

At the same time, allocations to alternative asset classes grew to 23 percent from 21 percent and international equities rose to 20 percent from 18 percent, and participating foundations expect those trends to continue this year.

Within the alternative asset class, hedge funds emerged as the leading option, garnering almost half all alternative investments for foundations overall and more than 62 percent for foundations with assets from $101-500 million.

Hedge funds were followed in popularity by private equity, which received 17 percent of allocations, private equity real estate with 12 percent, and energy and natural resources and venture capital, both of which drew 10 percent of assets.

The strong returns of 2006 prompted an increase in dollars spent by almost two in three foundations, the study says, but the percentage of assets spent overall fell to 5.5 percent, the lowest in five years.

Almost half the responding foundations say they determine their spending rates based on the moving average of their assets, while almost four in 10 stick to the IRS-mandated minimum of 5 percent.

Fewer than two in 10 foundations reported having investment restrictions based on social factors, but of those who do, three in four cite restrictions related to tobacco, three in 10 cite firearms and about a quarter cite alcohol or pornography.

The number of professional staff members at foundations overall grew slightly to 1.3 full-time equivalents from 1.2, the study says, and of those expecting to add to their ranks next year, almost half plan to hire an in-house analyst.

That is relatively low level of professional staff, says Jarvis.

These portfolios, especially with the trend toward alternative investments, require ongoing oversight, he says, but many smaller nonprofits outsource to consultants or rely on their investment committees rather than hire staff.

“This idea that staff are an unjust expense rather than part of risk management is disappointing,” he says.

Of those foundations that have professional staff, almost half employ a chief investment officer, almost a quarter have an analyst, and about the same number have a CPA.

For the first time, Commonfund this year analyzed the investment performance of operating foundations separately from private and community foundations.

The average return for the 101 operating charities studied, with combined assets of almost $55 billion, grew to 13 percent last year from 7.9 percent in 2005.

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