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Foundation returns drop, spending rises

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Mirroring the weakening economy, U.S. foundations earned less on their investments last year, but they still spent more money than in 2006, a new study says.

The average rate of return for a sample of 300 of the nation’s private and community foundations dropped to 9.9 percent in 2007 from 13.7 percent in 2006, says the 2008 Commonfund Benchmarks Study.

Although lower, that return should be enough to cover funders’ grantmaking and expenses without having to dip into endowment capital.

“Most foundation executives and trustees would likely be happy with consistent returns of 9.9 percent,” John Griswold, executive director of the Commonfund Institute, says in a statement.

Despite the lower returns, the average payout rate, or share of assets paid out for charitable purposes, remained at 5.5 percent for the third year in a row, the study says.

And for the almost two in three foundations that spent more in 2007 than in 2006, the average spending increase was 15.8 percent, much higher than inflation.

The sample group, comprised of 226 private and independent foundations and 74 community foundations, held combined assets of $95 billion in 2007.

The most profitable investments in 2007 were energy and natural resources, which returned 21 percent, followed by international equities, with a 15.9 percent return, and private equity, which posted a 14.7 percent return.

International equities also showed the largest drop in returns, down 9.9 percentage points from 2006, the report says, and domestic-equity returns also took a hit, falling to 7.5 percent in 2007 from 14 percent in 2006.

“The 2007 return on domestic equities – only slightly more than half the 2006 return – reflects turmoil in the domestic market as investors grew increasingly risk-averse in the wake of the subprime mortgage crisis and its fallout, a slowing economy and soaring energy costs,” says Griswold.

Fixed-income returns, on the other hand, rose to an average of 6.9 percent in 2007, up from 4.7 percent in 2006.

Overall, foundations invested 32 percent of their assets in domestic equities, 15 percent in fixed income, 20 percent in international equities, 28 percent in alternative strategies and 5 percent in short-term securities and cash.

However, asset allocations tended to follow foundation size, with larger funders putting more into alternative strategies and smaller ones investing more in domestic equities and fixed income.

The ability to diversify investments pumped up returns, the study says.

The 10 percent of foundations that saw the greatest returns, an average of 16.7 percent, invested 40 percent of their assets in alternative strategies, compared to 28 percent for foundations overall.

Community foundations took a hit in the amount of gifts received, with slightly over half reporting increases in contributions last year, and a third reporting decreases.

That compares to 70 percent that reported increases in gifts in 2007, and only 20 percent that reported decreases.

For the first time, the Commonfund report collected data on debt held by foundations, finding that 16 percent of foundations held debt averaging $50.4 million in 2007.

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