Endowments at the nation’s private foundations notched their third straight year of double-digit investment gains in 2021, posting an average gain of 16.3 percent, a rate of return that was not nearly as strong as the 29 percent achieved by the benchmark Standard & Poor’s 500 index, according to a study released Wednesday. Community foundations saw assets increase 14.8 percent, on average.
But wealthier foundations did much better, in large part because they shifted a larger share of their assets from equities into venture capital, hedge funds, and other approaches. Foundations with more than $500 million in assets achieved an average return of nearly 22 percent, according to the Council on Foundations-Commonfund Study on Investment of Endowments for Private and Community Foundations.
Those gains should buffer some of the setbacks foundation endowments experienced during the first half of this year, according to George Suttles, executive director of the Commonfund Institute.
That said, he and other experts say the performance could cause some foundations to pull back on grants out of concern about uncertainties in the stock market and the economy.
“Being able to ride right into 2022 on a relatively good market year for private and community foundations is going to be helpful,” given the damage that market turbulence and higher levels of inflation have had on foundation endowments.
Impact of Inflation
During the first six months of year, foundation assets fell by 17.3 percent, or about $235 billion, according to data compiled by FoundationMark, a company that tracks the performance of foundation endowments. Those losses have been compounded by higher inflation, Suttles said, which reduces the purchasing power of foundation grants. The Consumer Price Index, a measure of inflation, has hovered around 2 to 3 percent in recent years but now sits at 8.5 percent.
Many foundations generally add an inflation measure like the CPI to the federal requirement that they distribute at least 5 percent of their assets to charity each year to help guide their grant-making budget. When the CPI is 2 percent, that means that foundations must generate a 7 percent investment return to cover inflation and the required payout in order to sustain their existence into the future without eroding their endowment.
“With the diminishing of purchasing power and with capital markets so volatile, it’s going to be tough for private and community foundations to hit their short-term return target in 2022,” Suttles said. “The confluence of those two things that could potentially adversely impact grant making in this year.”
While Suttles said he expects some foundations will hesitate to make new multiyear commitments and consider cutting existing grant budgets, he also predicts some foundations will increase the amount they give in grants, even if their assets take a hit because the nonprofits they support are especially vulnerable during challenging economic times.
The study, which was based on data from 149 private foundations and 82 community foundations, showed that grant makers hewed very close to the minimum 5 percent payout requirement. Private foundations, on average, directed 5.1 percent of their assets to charitable causes, and community foundations, which do not have a minimum payout, directed 4.6 percent of their assets to charities. The community-foundation data only reflects endowments held by the foundations and does not include donor-advised funds they oversee.
To reduce risk, foundations typically spread their endowment investments in portfolios that can include publicly traded equities, bonds, private equities, and other investments such as real estate. The report includes the rate of return in 2021 for 14 investment indices or bonds. Private foundations outperformed six of those measures. Among the examples the report noted: the MSCI Emerging Markets Index, which posted a negative 2.5 percent return, almost 19 percentage points behind the average rate of return for private foundations.
Concerns From Nonprofits
Dave Biemesderfer, president of the United Philanthropy Forum, a network of foundations and philanthropy membership organizations, says he has been hearing from a growing number of charities that foundations are worried about how their endowments are faring and will trim their grant-making budgets over the next year.
“In times of more economic uncertainty, nonprofits face even more challenges and are dealing with greater needs,” he says. “And so if anything, that should be a time when foundations even increase their giving.”
To allay such fears, the Commonfund Institute’s Suttles points to record gains in longer-term foundation investing. Over the past 10 years, the annualized rate of return was 9.7 percent for private foundations and 9.2 percent for community foundations, nearly doubling the 10-year gains reported in 2017. Viewing investment returns in a longer time horizon, Suttles said, could allow foundation leaders to resist the urge to pull back on grant making.
“A lot of times the right answer is stay the course,” he said.
The study also found that grant makers are seeking to expand the roster of investment professionals they use.
The number of private foundations that seek to use diverse investment managers, based on race, gender, ethnicity, and other factors, increased from 11 percent to 17 percent last year. At community foundations, 23 percent reported doing so, up from 13 percent.
