FOUNDATIONS’ INVESTMENT RETURNS FELL TO 9.9% IN FISCAL YEAR 2007; TOP DECILE REPORT HIGHEST AVERAGE RETURN OF 16.7%

Commonfund Benchmarks Study^® Documents Continuing Support for Programs Despite Decrease From 13.7% Return in FY 2006; Allocations to Alternatives Increased; Spending Rate remains at 5.5%

WILTON, CT., June 5, 2008 – The 300 independent/private foundations and community foundations participating in the 2008 Commonfund Benchmarks Study® of Foundations reported an average total return of 9.9 percent (net of fees) in Fiscal Year 2007, down from the 13.7 percent return reported in last year’s Study.  Returns and all other data in the Study were for the calendar year from January 1 to December 31, 2007.

“While 2007’s results were down considerably from 2006, a 9.9 percent return should cover the average foundation’s spending, inflation and costs, enabling it to continue to support its programs and missions,” said John S. Griswold, Executive Director of Commonfund Institute, which sponsors the Study. Griswold pointed out that foundations participating in the Study reported that their average annual return objective was 8.5 percent, and that the most frequently cited return objective – reported by 44 percent of survey respondents – was in the range of 8.0 to 8.9 percent. “Most foundation executives and trustees would likely be happy with consistent returns of 9.9 percent,” Griswold observed.

The Study found that average three-year returns declined to 10.8 percent from 11.3 percent a year ago, but that average five-year returns jumped to 13.0 percent from 9.0 percent last year due to the removal of 2002’s -8.7 percent return from the calculation.

The highest reported returns, averaging 21.0 percent, were found in energy and natural resources strategies. In descending order, other leading asset class returns were: international equities, 15.9 percent; private equity, 14.7 percent; private equity real estate, 13.8 percent; marketable alternative strategies, 12.3 percent; venture capital, 11.1 percent; and distressed debt, 10.3 percent.

Both international and domestic equity returns were sharply down from FY2006, when international equity returns were 9.2 percentage points higher at 25.1 percent and domestic equity returns were 6.5 percentage points higher at 14.0 percent.  Domestic equities returned only 7.5 percent in FY2007.  “The 2007 return on domestic equities – only slightly more than half the 2006 return – reflects turmoil in the domestic market as investors grew increasingly risk-averse in the wake of the subprime mortgage crisis and its fallout, a slowing economy, and soaring energy costs,” Griswold said.

In contrast, fixed income returns rose to an average of 6.9 percent, up from 4.7 percent in 2006. “The higher interest rate environment in the first part of the year followed by the Federal Reserve’s interest rate reductions in the latter part of the year propelled fixed income returns higher,” Griswold commented.

Participating foundations reported average asset allocations of 32 percent to domestic equities (versus 33 percent in 2006); 15 percent to fixed income (16 percent in 2006); 20 percent to international equities (20 percent); 28 percent to alternative strategies (23 percent); and 5 percent to short-term securities and cash (8 percent).

“Foundations once again increased their allocation to alternatives,” Griswold said, adding, “Those with diversified portfolios, including higher allocations to alternatives and lower allocations to domestic equities, generally had less volatility in their returns.”

For the third consecutive year, the average effective spending rate – the rate obtained when dollars spent are divided into the foundation’s beginning-period asset value – remained constant at 5.5 percent.  More significantly, nearly two-thirds of foundations reported that they increased their dollar spending by an average of 15.8 percent – many times higher than the inflation rate.

A record 300 independent/private and community foundations participated in the Study, which categorizes and analyzes data by four different size cohorts and by type of foundation. The 300 foundations comprise 226 independent/private foundations and 74 community foundations, representing combined assets of nearly $195 billion.

Benchmarks Leaders

As in past years, the 2008 Commonfund Benchmarks Study Foundations Report included an analysis of the institutions in the top decile (top 10 percent) and top quartile (top 25 percent) of investment returns in the overall Study population. The objective of this analysis is to allow foundations to gain insight into the investment practices and policies of their “best of breed” peers.

Top decile institutions in the Study had investment returns averaging 16.7 percent, while top quartile institutions’ returns averaged 14.2 percent. Those returns in last year’s Study were, respectively, 18.5 percent and 17.1 percent.  In both absolute and percentage terms, these two Benchmarks Leaders groups had less volatility of returns than the Study population as a whole – another indication of the importance of prudent diversification in achieving superior returns.

While the Benchmarks Leaders tend to be larger institutions – a fact that highlights the considerable advantages that size offers – fully 62 percent of top decile foundations and 56 percent of top quartile foundations have assets under $500 million, indicating that allocations to relatively illiquid assets classes such as private equity, natural resources and private equity real estate are not limited to the very largest foundations.  Top decile institutions allocated 40 percent of their assets to alternative strategies; for the top quartile, the allocation was 37 percent. This compares with 28 percent for the Study population overall. Conversely, the Benchmarks Leaders have smaller allocations to domestic equities and fixed income securities, and are roughly even with the entire Study population in their international equities allocation. 

Additional Study Findings

Asset allocation

Participating institutions increased their alternative strategies allocation to an average of 28 percent from 23 percent last year and held 5 percent in short-term securities and cash compared with 8 percent a year ago. All other asset class allocations were modestly lower or level with last year: domestic equities, 32 percent, down from 33 percent; fixed income, 15 percent, down from 16 percent; and international equities, unchanged at 20 percent.

Allocations to alternative strategies were correlated with the size of the foundation, with larger institutions having higher allocations to alternative strategies and smaller foundations having higher allocations to domestic equities and fixed income.  Foundations with assets in excess of $1 billion allocated the most to alternative strategies – an average of 30 percent, up strongly from 25 percent a year ago. They funded the increase almost entirely from short-term securities and cash, which was reduced to 5 percent this year from 10 percent last year. For these foundations, allocations to other asset classes remained virtually unchanged. 

Rebalancing

Eighty-five percent of participating institutions reported rebalancing their investment portfolios during FY2007, up modestly from 82 percent in FY2006. Twenty percent of foundations reported that they rebalance quarterly and 16 percent reported rebalancing annually. Of those using market value-based rebalancing, 47 percent reported that their decisions are target- and range-based. Looking ahead to future rebalancing decisions, foundations generally said that they expect to increase their allocations to alternative strategies and to reduce allocations to publicly traded asset classes. 

Spending

As mentioned, the average effective spending rate held steady at 5.5 percent for the third straight year while dollar spending increased strongly. The smallest foundations in the survey (those with assets between $51 and $100 million) reported the highest average effective spending rate, 6.1 percent. Twenty-six percent of participating foundations said that they increased their effective spending rate in FY2007, while 21 percent said that they lowered it. The two most frequently-used spending methods were reported to be spending a percentage of a moving average – used by 43 percent of survey respondents – and seeking to meet the IRS minimum of 5 percent – used by 39 percent.

Gifts and Donations

Among community foundations, 51 percent reported increased gift flow in FY2007, while 32 percent reported a decrease – a less favorable situation than that which existed in FY2006, when 70 percent reported increases and only 20 percent reported decreases. (The gift flow analysis focuses on community foundations because independent/private foundations generally receive a single amount at their founding and are less likely than community foundations to engage in fund-raising activities.)

Debt

For the first time, the Foundations Study inquired this year about foundations’ debt, finding that 48 institutions (16 percent of all respondents) have debt of some kind.  Among these institutions the average debt level was $50.4 million, while the median debt level was $11.8 million. Debt levels of foundations with assets of more than $1 billion were $226.3 million – more than 60 times the average debt level of the smallest foundations in the Study – indicating the value of examining the median as well as the average figure.

Resources and Governance

Foundations participating in the Study reduced the average number of full-time equivalent (FTE) staff to 1.2 in FY 2007 from 1.3 in FY2006. The reduction can be attributed almost entirely to the foundations with assets over $1 billion, which reduced their average number of FTEs to 4.0 from 4.6 a year ago. The highest number of FTEs reported, by a foundation in the over $1 billion cohort, was 19. The most frequently-occurring staff title was Chief Financial Officer, reported by 56 percent of participants; 19 percent reported having a Chief Investment Officer.

Foundations in the Study reported using an average of 21.9 investment management firms, up slightly from last year’s average of 20.9 firms. As might be anticipated, the number of firms used correlated with size, with the largest foundations in the Study using an average of 56.6 investment management firms and the smallest using an average of 10.0 firms.  Seventy-seven percent of Study participants reported using the services of an outside investment consultant.

The average number of voting members on foundations’ investment committees was reported to be 6.0, little changed from last year’s 5.9 and showing little variation by size of foundation. Seventy-five percent of foundations have conflict of interest policies in place for their board and investment committee. Eighty-seven percent of foundations extend the policy to include senior staff members.

Research Process and Methodology

The review of the 2007 Study and the design for the 2008 Commonfund Benchmarks Study took place in the winter of 2007. Field interviews with the 300 participating institutions followed in the first and second calendar quarters of 2008.

Participating institutions were interviewed by telephone, a research technique that assures greater integrity in the data gathering process. Interviewers spoke directly with the ranking business officers at participating institutions.

Data from the overall Study population of 300 foundations were segmented into four size categories to permit analysis of the policies and practices of foundations of differing sizes. The four categories were foundations with:

·         Assets in excess of $1 billion

·         Assets between $501 million and $1 billion

·         Assets between $101 million and $500 million

·         Assets between $51 million and  $100 million

As noted earlier, data were also sorted by type of institution: independent/private and community foundations.

About Commonfund Institute

Commonfund Institute was founded to house the education and research activities of Commonfund and to provide the entire nonprofit community with investment information and professional development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. Commonfund Institute provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications including the annual Commonfund Benchmarks Study® and the Higher Education Price Index (HEPI); and events such as the annual Commonfund Endowment Institute and the Commonfund Prize for the best contribution to endowment investment research. Its broad range of programs and services are designed to serve financial practitioners, fiduciaries and scholars. In addition to the Foundation Study, Commonfund Institute conducts Commonfund Benchmarks Studies of educational institutions, operating charities and nonprofit healthcare organizations. 

About Commonfund
Commonfund Institute was founded to house the education and research activities of Commonfund and to provide the entire nonprofit community with investment information and professional development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. Commonfund Institute provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications including the annual Commonfund Benchmarks Study® and the Higher Education Price Index (HEPI); and events such as the annual Commonfund Endowment Institute and the Commonfund Prize for the best contribution to endowment investment research. Its broad range of programs and services are designed to serve financial practitioners, fiduciaries and scholars. In addition to the Foundation Study, Commonfund Institute conducts Commonfund Benchmarks Studies of educational institutions, operating charities and nonprofit healthcare organizations.