News and analysis
July 23, 2014

Foundation Investments See Double-Digit Growth for a 2nd Year in a Row

Private-foundation investments grew 15.6 percent on average in 2013, the second straight year of double-digit increases.

Foundation asset managers made most of their gains in domestic equities, which rose 31.8 percent, according to the 2013 Council on Foundations-Commonfund Study of Investments for Private Foundations. That closely tracks the performance of the Standard & Poor’s 500, which grew nearly 30 percent last year.

The performance was a significant increase over the 12-percent gain in 2012. However, foundations should expect a tougher year this year, stemming from geopolitical conflicts, leaner corporate earnings, and uncertainty surrounding federal monetary policy, said John Griswold, executive director of the Commonfund Institute, the research arm of Commonfund, an investment firm that specializes in endowments, foundations, and pension funds.

"Volatility is here to stay, period," he said. "People have to get used to it."

The study compiled data from 153 foundations. It found that net returns grew an average of 12 percent annually over the past five years, a significant improvement over last year, when the five-year average annual return was 1.7 percent. Last year’s five-year return rate included 2008 results, when the plummeting market erased 26 percent of foundation investments.

In another indication that foundations have put the recession in the rearview mirror, 12 foundations that reported carrying debt owed on average $42.4-million in 2013, down from $46.5-million the previous year.

But even though foundations seem to have put the market collapse of 2008 behind them, the charities they support are still lined up for cash. The report showed that 56 percent of foundations have increases in spending, up from 47 percent the previous year.

Typically, a higher rate of return would result in a decline in foundations’ effective spending rate, a figure calculated by dividing the amount spent on a foundation’s mission by it’s market value.

Last year foundation payout rates were 5.5 percent, a slight increase from 5.4 percent in 2012. The reason is that grantees are still recovering from the economic downturn. "You’d expect the rate to go down because of the high returns, " he said. "The reality is charities are still needy and foundations are besieged with requests."

The study also found:

  • Foundations with assets greater than $500-million enjoyed an investment return of 16.5 percent. Those with assets from $101-million to $500-million realized 15.5 percent growth, while smaller foundations notched a 15.2-percent increase.
  • Over all, 25 percent of the foundations reported having a chief investment officer. For those with assets greater than $500-million, that figure rose to 58 percent.
  • International equity returns grew 15.9 percent
  • Alternative investment strategies produced a 7.3-percent return and included distressed debt (24.4 percent); venture capital (14.2 percent); hedge funds, derivatives, and other marketable strategies (12.6 percent); real estate (9.4 percent); and commodities and futures (-8.3 percent).
  • At the end of 2013, foundations’ investments were spread over domestic equities (24 percent), fixed income (9 percent), international equities (20 percent), alternative strategies (42 percent), and short-term securities/cash (5 percent).

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