Foundations: They’ve Taken a Blow from “Subdued” Markets

Both private and community foundations depend heavily on U.S. equities. Indeed, domestic equities remained the bright spot while other strategies underperformed in 2014. A new report from a collaboration of the Council on Foundations and Commonfund provides food for thought about the reversal in foundation returns in that year.

The Study of Foundations by this collaboration, known as the CCSF, is three years old. Its third annual report is now available, and 244 private and community foundations participated.

The participating private foundations (142) reported an average return of 6.1% for the 2014 fiscal year. What stands out is that this is down significantly from the 15.6% return reported the year before.

Informed Decisions

Meanwhile, the participating community foundations (102) reported an average return of 4.8%, also a large drop from last year’s number: 15.2%.

In a joint statement, Vikki Spruill, president and CEO of the Council on Foundations, and John S. Griswold, executive director of Commonfund Institute, said: “This research provides foundation leaders benchmarking to understand their own financial performance, and it will help them make informed decisions about both their investment and grantmaking strategies.”

They also said that “foundation leaders continue to invest in communities through steady mission-related grantmaking, even though their FY2014 returns were affected by subdued global equity markets.”

More Detailed Data

In both 2013 and 2014, the most productive part of the portfolio for foundations was, as above noted, domestic equity. This produced 10.4% for private foundations in 2014 and 9.8% for community foundations.

Alternative strategies didn’t do so well for foundations, producing 4.4% return for the private foundations last year and 3.7% for community foundations. The table below shows a more complete breakdown. (All numbers represent percentages.)

Source: 2014 CCSF Results, p., 16

The study also breaks the alternative strategies category down into private equity, marketable alternative strategies, venture capital, PE real estate, energy and natural resources, commodities and managed futures, distressed debt. Within those categories, VC did the best, commodities the worst.

Asset Allocation

Participating institutions have shifted the way they divvy up their portfolios among strategies, from one year to the next. The share going to domestic equities increased slightly for private foundations from 2013 to 2014 (from 24% to 25%), but increased more markedly for community foundations (28% to 34%). Here are the particulars for that and other strategies, in the table below:

Source: 2014 CCSF Results, p., 17

The report breaks these figures down further by looking at the size of the different institutions involved. As a general rule, the smaller institutions (defined as those with $101 million or less assets under management) are more reliant on domestic equities than the medium sized or larger institutions. Specifically, the 39% of the assets of small community foundations, and 35% of those of the privates of that size, are in domestic equities.

Likewise, the smaller foundations rely on fixed income instruments a good deal more than do the larger ones.

Alternative strategies, unsurprisingly, is a game for the big dogs.

Breakdown of alternative strategy allocations  

The 44% of the assets of private foundations that go to alternatives break down this way, from most to least crowded segments:

• Marketable alternative strategies, 17%;
• Private equity, 8%
• Private equity real estate (not the campus grounds), 4%
• Venture capital 4%
• Energy and natural resources 3%
• Distressed assets 2%
• Commodities and managed futures, 1%
• Other 5%.

The numbers for community foundations are somewhat different, but the order is very similar: largest for marketables, then PE, then everything else in various small increments, and “other” at 5% in both cases.