News and analysis
August 27, 2015

Foundation Investment Growth Slowed Substantially Last Year, Study Says

Spencer Platt, Getty Images

The investment portfolios of private foundations grew at a slower pace than in the previous two years.

The investment portfolios of private foundations grew 6.1 percent in 2014, a slower pace than in the previous two years, when endowment officers cheered double-digit gains.

Returns at community foundations slowed as well, dropping from 15.2 percent in 2013 to 4.8 percent last year, according to a study released Thursday by the Council on Foundations and the Commonfund Institute.

Despite the slower growth, 2014 was the third straight year that foundation investments moved in a positive direction. However, this week’s market sell-off has increased anxiety among investors.

A deflating market "does put a question mark above the numbers we are, in some ways, celebrating today," said William Jarvis, managing director at the Commonfund Institute, the research arm of Commonfund, which manages institutional investments.

Coming off strong performances in 2013, when their investment gains neared 16 percent, 84 of the 142 private foundations in the study, or 59 percent, increased their grant making and mission-related spending. Thirty percent decreased grant making. Community foundations continued to funnel money toward grantees as well; 61 percent said they increased spending on their missions, and 15 percent decreased their amount of grants.

"As the recovery proceeded, foundations have taken the returns in their portfolios and turned around and spent them in their communities as grants," Mr. Jarvis said. "They have stepped up to the plate."

However, as the healthy market helped increase the size of endowments, spending rates — the percentage of a foundation’s assets it makes in grants — dropped slightly for private foundations, from 5.5 percent to 5.4 percent, and remained unchanged for community funds, at 4.8 percent.

Foundations typically make more grants in the year following a bull market. As their assets grow, private foundations need to send more money out the door to comply with federal rules mandating that they spend at least 5 percent of their assets on grants and certain administrative expenditures.

Gains in foundation investments last year lagged far behind the S&P 500, which climbed 13.7 percent. Measured over 10 years, however, the return for foundations, averaging 6.3 percent annually, was closer to the popular index of U.S. stocks, which climbed, on average, 7.7 percent a year in that period.

Some observers see the recent market declines as an opportunity. Kim Lew, a chief investment officer at the Carnegie Corporation of New York, said stocks have been priced too high. She has been saving cash, waiting for an opportunity to buy equities at a lower price.

Still, she said, plunging shares have her concerned. "It would be disingenuous to say the markets didn’t rattle us," she said.

The study also showed:

  • Foundations made modest shifts in their investment strategies in 2014. Private foundations bumped up the portion of their assets in domestic equities from 23 percent to 24 percent, and reduced their holdings in international stocks from 20 percent in 2013 to 18 percent.
  • Community foundations increased their domestic stock holdings from 28 percent to 34 percent (largely by shifting funds from cash to equities). Meanwhile, they reduced their stake in alternative investment strategies (such as private equity and venture capital) from 27 percent to 25 percent.
  • Investments at private foundations with more than $500 million in assets increased 7.1 percent. Community foundations of that size gained 4.9 percent on their investments. Community foundations with assets of $101 million to $500 million had lower gains of 4.2 percent, but investments at community funds with less than $101 million in assets gained 5 percent as a result of higher allocation in U.S. equities.

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