For the first time in several years, the Ford Foundation disclosed the investment performance of its $12.1 billion endowment, saying it generated a return of 7 percent in 2016. By comparison, the median return of more than 5,700 foundations that have filed their tax returns for 2016 was 7.24, according to Foundation Financial Research, a start-up company that has built a database of foundation endowments at FoundationMark.
For the five years ending last December 31, Ford said its endowment generated a 9.2 percent return, outperforming the median return of 7.72 percent for the foundations that FoundationMark tracks. Endowment performance is best assessed over longer time periods because year-to-year returns can fluctuate.
Meantime, over those same five years, a sample portfolio of low-cost, passively invested index funds from Vanguard, with 70 percent invested in stocks and the rest in fixed-income securities, delivered a 9.1 percent annualized return. Those returns lagged just behind the Ford Foundation but well ahead of the foundation averages.
What that means is that as a group, U.S. foundations, which have a collective $800 billion in assets under management, would have done better during the past five years if they had ignored active portfolio managers — that is, people who pick stocks and try to time the markets — and simply held low-cost index funds. Individual foundation returns vary, of course, and it’s possible that actively managed portfolios will beat indexes from time to time.
Billions More for Charity
As important as the numbers is the fact that they are being disclosed. Most foundations don’t reveal the investment returns of their endowments, making it impossible to compare one to another.
Of the 10 biggest private U.S. foundations by assets, according to the Foundation Center, just three — Ford, W.K. Kellogg, and William and Flora Hewlett — disclose their endowment performance. (Ford reported on its endowment returns until 2012, then stopped, and now has resumed the practice.) The other seven — the Bill & Melinda Gates, Robert Wood Johnson, David and Lucile Packard, and Gordon and Betty Moore foundations as well as Bloomberg Philanthropies, J. Paul Getty Trust, and the Lilly Endowment — do not.
All foundations are required to report the amount of their assets on the tax returns they file with the Internal Revenue Service and are required to make public, but they aren’t expected to calculate or report on their investment returns to the public. Soon, though, Foundation Financial Research intends to make aggregated data about endowment returns public on its FoundationMark website, according to John Seitz, founder of the company. People who can prove they are foundation trustees, for example, will be able to freely access reports comparing their foundation with its peers.
“I’d like to see trustees look at this and challenge their managers,” Mr. Seitz says. “I want to see competition and transparency.” His goal, he says, is “to have foundations with more money in their pocket to give away.”
His company is also building FoundationIQ, a subscription website that will be marketed to asset managers so they can then offer their services to foundations with subpar performance. Most small and midsize foundations rely on outside advisers to manage their portfolios.
“This is less about the hundred foundations that are over $1 billion than about the 40,000 that are not,” Mr. Seitz says.
Mr. Seitz has uncovered big differences in endowment performance. The top quartile of foundations has delivered 9.2 percent annualized returns over the five years ending in December 2016, while the bottom quartile has delivered 6.47 percent. In dollar terms, that amounts to a $2.7 million per year difference for a foundation with $100 million in assets.
Bringing the performance of the bottom quartile up to the median “could increase money to charities by billions of dollars,” Mr. Seitz says.
Active vs. Passive Management
Most foundations would be better off holding low-cost index funds, according to such respected investors as Warren Buffett, the founder of Berkshire Hathaway, and David Swensen, the manager of Yale University’s $37 billion endowment. In his latest letter to Berkshire Hathaway investors, Mr. Buffett wrote: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
Index-fund giant Vanguard manages about $77 billion in assets for more than 2,400 nonprofits, and it has added about 800 new clients in the past five years.
Those investment advisers who favor active management say index investing has done well because of the long bull market in U.S. stocks. David Druley, chief executive of Cambridge Associates, which manages endowments for foundations, says the next decade’s best performers will likely not be those that load up on passive equity investments and bonds. “It’ll be a more robust landscape for good active managers,” Mr. Druley told the annual Milken Institute investment conference last spring.
Mr. Seitz, a former asset manager, won’t offer investment advice. He built his database by using software to pull information from Form 990-PF tax returns filed digitally with the IRS and by hiring contractors to input the rest manually. The data isn’t perfect, he acknowledges. Because foundations report on their investment costs in different ways, it’s not always clear whether their returns include investment fees. Ford’s returns take into account the fees paid to outside asset managers but not the costs of the foundation’s own investment office.
Hedge Funds and Private Equity
The most surprising thing about Ford’s endowment is that 60.1 percent of assets are invested with alternative investments, mostly hedge funds, and another 21.2 percent are allocated to private-equity funds and venture capital. Hedge funds have fallen out of favor lately because of their high costs and declining performance.
“These high-fee alternative investments haven’t proved that they can beat passively managed indexes,” says Jeffrey Hooke, an investor and senior lecturer at the Johns Hopkins business school. But Ford has been able to select top-performing alternative investments.
In the financial snapshot released on Tuesday, Ford also said it spent $535 million on programs in 2016, including grants and related activities, down from $609 million in 2015. Its operating expenses were $122 million, up from $114 million the previous year.
