Assets at private foundations have soared in recent months to about $1.1 trillion, regaining all the ground lost since the market plunge in March, according to new estimates from FoundationMark, a research organization that tracks foundation investments and performance.
That rebound in assets, along with efforts by many foundations to boost payout amid the current economic crisis, may signal a surprisingly strong grant making year by the end of 2020.
Several large grant makers, such as the MacArthur Foundation, confirmed that their assets had recovered since March. MacArthur spokeswoman Kristen Mack noted in an emailed statement that the foundation had decided even before the market rebound to boost its grant making in response to the unique challenges nonprofits are facing.
“Earlier this year we decided that it was essential for the foundation to allocate additional funds beyond our roughly 5 percent annual payout — and 7.4 percent payout in 2019,” Mack said.
FoundationMark estimates that grant makers’ assets had fallen to $947 billion by the end of March, down from a high of nearly $1.1 trillion in December. As a result of those losses, the research organization estimated in April that grant making this year would decline 4.8 percent, to about $80 billion, citing historical trends in the relationship between assets and grant making.
John Seitz, CEO of FoundationMark, says that because of the rebound in the stock market and foundation assets, he’s now projecting that grant making this year will be about $85 billion. However, the total could be substantially higher as grant makers boost giving in response to the impact of Covid-19 on nonprofits.
“In an ordinary year, we would expect foundations to pay out about 8 percent of their average assets in grants, gifts, and operating expenses, which would imply $85 billion, but foundations’ response to Covid-19 may well increase that spending rate,” Seitz said.
Seitz, a former Wall Street portfolio manager, argues that it’s “a huge misconception” that foundation payout hews closely to the minimum 5 percent required by law; the average is actually around 8 percent. Seitz said that other studies showing annual foundation payouts averaging closer to 5 percent may produce different results because they track only larger foundations. Seitz says his data covers foundations of all sizes and that many small foundations exceed the 5 percent minimum requirement.
Conservative Investing
The rebound in asset levels is due to two main factors: the overall recovery in the stock market and the propensity of foundations to avoid sudden investment moves based on market fluctuations, Seitz says. In other words, unlike many individual investors, foundation investment managers rarely engage in panic selling when the market plunges.
For historical perspective, Seitz points to the stock-market decline that began late in 2007 as the financial crisis gripped the nation. During that frantic time, data suggests that foundations’ asset allocations shifted only 7 percent toward cash and bonds.
He also noted that many foundations are heavily invested in hedge funds and private-equity markets, and foundations can’t pull money out of those kinds of investments abruptly.
However, Seitz cautioned that despite the powerful stock-market rally, broader economic worries may yet hurt foundation assets longer term and, correspondingly, the share of assets they distribute.
Foundations Respond
A spot check of some large foundations confirmed that their assets had fully or mostly recovered since March.
The Kresge Foundation expects to end the year “about where we started,” with about $3.7 billion in assets, said Amy Robinson, the foundation’s CFO. She said the foundation doesn’t make sudden investment moves based on short-term market fluctuations.
The foundation has offered more flexibility to its grantees, but it’s not boosting overall payout, according to Robinson. “We are a strategic organization,” she said.
Kim Lew, chief investment officer at the Carnegie Corporation of New York, said her organization’s assets had recovered since March as well, but she said that because of overall modest investment returns, it would not change its grant-making budget.
“We have not increased our grant making budget because we believe there is significant risk of increased volatility over the next year,” she said in an emailed statement. “However, we continue to discuss the situation, and should expectations shift, we will reconsider our current stance.”
Longterm Outlook Not as Bright
FoundationMark projects that new contributions to foundations will decline 20 percent this year, to $40 billion, down from an estimated $50 billion in 2019. That estimate is based on what occurred in 2008 amid the previous recession. As the economy continues to struggle, even people who are doing well in the stock market may curtail giving to family foundations until the economic outlook improves. So the longer-term outlook for grant making may not be as bright as in 2020.
Meanwhile, another new report from Commonfund and the Council on Foundations showed powerful growth for assets in the year before the pandemic hit. The study found that returns for private and community foundations last year were the best since 2009, with an average report of 17.4 percent for private foundations and 18.2 percent for community foundations.
