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Foundation investment returns dive in 2008

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Ret Boney

U.S. foundations lost an average of 26 percent on their endowment investments last year, a sharp turnaround from 2007, when returns averaged almost 10 percent, a new study says.

While that means an evaporation of about $46 billion in wealth for the 290 foundations surveyed, almost half gave away more in 2008 than in 2007 by an average of 20.4 percent, says the report from the Commonfund Institute.

“This shows that foundations in a time of crisis understood their role was to support the missions of the grantees who were relying on them,” says William F. Jarvis, managing director and head of research for the institute.

However, almost a third of respondents reported their dollar spending was down last year, more than doubling the share who gave less the year before.

“We learned that risk has to be defined differently, as the inability of the endowment to generate enough cash to fund the mission of the institution,” says Jarvis.

And that raises important questions for the future, he says.

“Now that we know how this can happen, how do we find money for this cycle and what do we do going forward,” asks Jarvis. “How do we make sure we’re prepared if this happens again?”

Lack of liquidity was a major issue for many institutions, he says, and foundations should be planning now to always have cash on hand.

For some, that means creating cash reserves to cover one to two years of their budgets, or setting up lines of credit.

And foundations should examine whether there are changes they can make to their portfolios to create better diversification than they had going into the downturn.

“The real takeaway is we never want to get caught again without liquidity,” he says.

Virtually all asset classes saw negative returns last year, with the exception of fixed income, which earned 0.6 percent.

International equities led the downward charge, earning negative 41 percent, followed by domestic equities with a return of negative 36.3 percent.

Alternative strategies, which for several years had outperformed most other asset classes, earned a return of negative 16.4 percent, and cash and short-term securities earned negative 1.87 percent.

Within the alternative investments class, returns for energy and natural resources performed worst, with a return of negative 23.3 percent, while venture capital did best, returning negative 6.2 percent.

Average asset allocations changed significantly as foundations attempted to rebalance their portfolios amid market volatility.

The biggest change was in the amount allocated to alternative investments, which held 36 percent of foundation assets in 2008, compared to 28 percent in 2007.

Part of that spike is due to the illiquid nature of many alternative investments, which could not be easily sold in the frenzy to rebalance portfolios.

Predictably, allocations to domestic and international equities both fell, with domestics accounting for 27 percent, compared to 32 percent in 2007, and internationals garnering 15 percent in 2008, down from 20 percent the year before.

Allocations to fixed income and short-term securities and cash remained virtually flat, accounting for 16 percent and 6 percent of portfolios, respectively.

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