News and analysis
May 02, 2010

Smaller Nonprofit Endowments Outperformed Larger Ones in 2009, Chronicle Survey Finds


Inside the Data: Browse our database of endowments at nonprofit organizations and foundations.

Small was beautiful in 2009. The smallest charity and foundation endowments solidly outperformed their bigger and more celebrated counterparts, according to a new Chronicle survey. Investment returns varied depending on when an endowment’s fiscal year ended, but the endowments with less than $100-million in assets had gentler declines and greater advances than their peers with assets of $1-billion or more.

The 35 small endowments with a fiscal year ending in June lost a median 17 percent in 2009, a smaller investment loss than the nearly 20 percent median loss suffered by the 29 biggest endowments with June fiscal years. Among foundations with fiscal years ending in December, the 23 small endowments earned a median return of 21 percent, compared with a median return of only 19 percent for the 17 big endowments.

The strong returns for small endowments may also be an endorsement for simplicity over complexity. The smallest funds have a median of 50 percent of their assets in stocks and a median 25 percent in bonds. (A median figure means that half of the funds had a higher percentage of assets allocated in that fashion and half had a lower percentage.)

The biggest endowments have more of their assets in so-called alternative investments like hedge funds, real estate, and private-equity funds.

John S. Griswold, executive director of Commonfund Institute, in Wilton, Conn., the research arm of the investment manager, says small endowments are benefiting from a robust rebound in the stock markets, while private investments that are less easy to sell continue to lag.

“The smallest endowments with the most exposure to public markets did better than their larger brethren for the first time in many, many years,” Mr. Griswold says.

Losing Their Luster

Alternative investments were all the rage among the overseers of nonprofit endowments just a few years ago, as midsize funds sought to emulate the broad diversification among asset classes that had earned strong long-term returns for the likes of Harvard and Yale universities.

Even today, alternative investments remain popular. Among all 211 endowments in The Chronicle’s survey, the median allocation to hedge funds dropped just one percentage point, from 18 percent in 2008 to 17 percent last year. The allocation to private equity increased slightly, to 6 percent of assets. Meanwhile, the median allocation to stocks dropped to 42 percent, from 46 percent in 2008, and the median allocation to bonds rose to 19 percent, up from 18 percent a year earlier.

Yet some endowment managers are cutting back on alternative investments.

The Nature Conservancy, in Arlington, Va., cut its allocation to hedge funds from 25 percent to just 20 percent by firing managers of “risky” funds that use a lot of debt to seek strong returns, says Craig Neyman, the conservancy’s chief investment officer. The conservancy also stopped making new investments in private-equity funds.

“The hedge-fund asset class as a whole performed fine for us, but the returns produced by individual managers were highly volatile,” Mr. Neyman says. “We decided to dial back on some of the risk in the portfolio.”

Despite the strong returns produced by the stock market last year—the Standard & Poor’s 500 index returned 27 percent—the value of endowments held by all 211 groups in The Chronicle’s survey dropped by a combined $45.8-billion, to about $298-billion.

To date, the stock market is up more than 70 percent since hitting bottom in March 2009. Endowment managers in The Chronicle’s survey say they expect solid results for 2010, with estimated returns on investment ranging from 5 percent to 20 percent.

Staying Liquid

The bullish sentiment is making some who oversee assets nervous.

The Silicon Valley Community Foundation, in Mountain View, Calif., earned one of the highest returns in The Chronicle’s survey, with a gain of nearly 28 percent.

Even so, Bert Feuss, the foundation’s vice president of investments, says he has tried to build in some protection should the economy falter again. The endowment keeps 40 percent of its assets in alternative investments like hedge funds and private-equity funds, but Mr. Feuss says the foundation makes sure that a big portion of those investments are “very liquid” so that it can tap into them if necessary. The group has nearly a quarter of its assets in bonds and 10 percent in “absolute return” hedge funds that attempt to earn a positive return regardless of what’s happening in the markets.

“When your cash flow is turning negative, and your assets are dropping, your ability to respond to grant seekers becomes constricted,” Mr. Feuss says. “So having an endowment that’s resilient to downturns is definitely important.”

An Emphasis on Safety

Many organizations in The Chronicle’s survey said they were shifting from riskier assets into safer ones.

American Society for Technion-Israel Institute of Technology, in New York, which raises money for a university in Israel, is an example of the trend. During the financial crisis, it lost $72-million in the investment fraud perpetrated by Bernard Madoff and suffered along with other endowments as the public markets sank.

In March 2009, just as the stock market was hitting bottom, the society’s investment committee voted to move to a very conservative asset allocation—with just 30 percent in equities and 70 percent in bonds. The prior policy had been 70 percent equities and 30 percent bonds.

That move contributed to a subpar performance in 2009, as the markets subsequently rallied. The organization earned 16 percent for the calendar year, lagging the median return of 20 percent for endowments with a December fiscal year.

Michael Schementi, the society’s chief financial officer, says it is now moving back toward its traditional weighting of 70 percent in equities and 30 percent in bonds for the $181-million endowment. He says the group needs a more aggressive allocation to adhere to its mission of providing income to the university.

“We see the economy moving in the right direction,” Mr. Schementi says. “There may be some dips here and there, but it will be nothing like it was a year ago.”

Making Changes

Only 39 organizations (19 percent of respondents) said they had put some of their endowment in investments that further their social mission. The Foundation for a Healthy Kentucky, in Louisville, is now offering loan guarantees as part of its effort to improve primary care in rural communities. “It was a way to help communities with capital construction costs, yet still make sure our grant funds are still going into programs,” says Susan G. Zepeda, the foundation’s executive director.

Some experts on nonprofit organizations have urged foundations to increase their spending to enable charities to provide more services to poor and working families. But relatively few foundations in The Chronicle’s survey spent significantly more than the 5 percent required by law.

The Ford, Annie E. Casey, and Skoll foundations all distributed 7 percent of assets or more. The Annenberg Foundation, in Los Angeles, had the highest spending rate among private foundations, at nearly 11 percent of assets. (That high spending rate contributed to a 36-percent drop in endowment value at the foundation, to $1.6-billion, the largest percentage loss among all groups in the survey.)

Meanwhile, some charities tried to preserve the value of their endowments by reducing the amount they spent. The Huntington Library, Art Collections, and Botanical Gardens changed the way it calculates endowment value from a three-year rolling average to a specific date. By using the endowment’s value on December 31, 2008, the endowment will pay out about $1.3-million less during the 2010 fiscal year than it would have under the prior system.

“It put us in a more maneuverable position,” says Alison D. Sowden, the Huntington’s vice president for financial affairs, “in the event that the Great Recession became a depression.”

Emma L. Carew contributed to this article.