Despite evidence showing that professional money managers who pick stocks, bonds, and alternative investments consistently fail to beat the markets, most foundations continue to turn to Wall Street to manage their endowments.
They are paying a steep price for doing so. Foundations are giving up an estimated $20 billion a year that could be devoted to charitable purposes, according to the latest data from FoundationMark, a company that tracks the performance of foundation endowments.
FoundationMark estimates that during the first half of 2022, U.S. foundation assets fell by 17.3 percent, or about $235 billion, from a record $1.3 trillion at the end of 2021. That drop was caused by falling asset prices, but the performance of professional asset managers who delivered subpar results only made matters worse.
FoundationMark reports that the investment returns of foundation endowments, taken together, lagged passive market indexes during the declining markets of 2022 as well as during the past one-year, three-year, five-year, and 10-year periods.
In other words, most foundation trustees and investment officers would have done better by investing their endowments in low-cost index funds, which simply try to match the performance of broad market sectors.
The 10-year period is most relevant because foundations invest for the long term. Over that time, the Grantmaker Investment Value Index, which reflects the estimated performance of about 40,000 foundations, returned 6.5 percent annually. A benchmark portfolio, with 60 percent invested in U.S. large-capitalization stocks and 40 percent invested in U.S. bonds, returned 8.5 percent.
Foundations together hold slightly more than $1 trillion in assets, so the 2 percent gap in returns represents about $20 billion a year for all grant makers. For a foundation with assets of $100 million, each percentage point of gain or loss in its investment returns is worth $1 million — the equivalent of 20 percent of its grant-making budget if the foundation, like many, gives away 5 percent of its endowment per year.
“Better investment performance means more money to charity,” says John Seitz, a former Wall Street analyst who started FoundationMark in 2018. His goal is to improve the investment performance of endowments by making data available at no cost to foundation trustees, who can then exert pressure on money managers to improve.
Seitz says that most of the poor performers are small to midsize foundations.” Large foundations tend to do better than small ones because they are in a better position to identify the relatively few money managers who consistently outperform the markets.
Kathleen Enright, CEO of the Council of Foundations, says middle-tier foundations may aspire to do more than they can.
“There’s a felt expectation that they should engage in the sophisticated endowment management that the very largest foundations engage in,” she says. “But they are attempting to do so without access to the same caliber of investment advisers that the large foundations have. So the results suffer.”
Tim Ortez, vice president and chief financialinvestment officer of the Weingart Foundation, says index funds that hold stocks in the entire market may not be suitable for many foundations. Weingart hires Cambridge Associates, a money-management firm that builds custom portfolios for clients. including foundations, to manage its money.
Weingart has goals for its endowment that go beyond maximizing returns. It wants to divest from companies that produce fossil fuels, tobacco, and firearms and that operate private prisons. It also seeks to align its endowment with its grant making by, for example, investing in affordable housing in southern California, where the foundation is based. “We’re using our investment to further our mission,” Ortez says.
The Central Carolina Community Foundation is one of the few foundations that has invested its endowment in index funds. It says that its 10-year return for the decade ending June 30, 2021, was 8.84 percent. That was, unsurprisingly, better than its peers.
