On September 27, 2023, Commonfund Institute hosted a webinar, “Highlights of the 2022 CCSF: A Deep Dive with Foundation Leaders.” The panel featured Elizabeth McGeveran, Director of Investments at McKnight Foundation, Bob Sorge, President and CEO of Madison Community Foundation, Steve Snyder, Managing Director at Commonfund OCIO, and was moderated by Commonfund Institute’s Executive Director, George Suttles.
Returns, Spending, and Asset Allocations
The event kicked off with a discussion of the headline results from our recently released Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF) Study, which found that private and community foundations on average reported -12 percent and -13.3 percent returns, respectively, in 2022. While these results were consistent with the experience of McKnight and Madison Community Foundations, all panelists emphasized outsized importance of 5- and 10- year returns, which as historical CCSF data show, are on an uptrend across foundations. Panelists reflected that the goal of foundations as long-term institutions is to maintain purchasing power over the long term, despite market cycles and volatility.
The conversation quickly turned to spending – the link between endowments and organizational missions. Spending policy helped organizations stay on course despite turbulent markets and a high inflation environment in 2022. Under Sorge’s leadership, and in collaboration with Commonfund, Madison Community Foundation changed their spending policy from a banded approach to a 20-quarter moving average, in order for grantee support to reflect long-term market conditions (without overspending in an up year or underspending in a short-term down trend). They sought to bolster community organization capacity with resources beyond just grant funding, for example, with assistance applying for PPP loans during the pandemic and IRA-funded grants for local solar projects.
Regarding both spending policy and asset allocation, the panelists reported minimal changes over the past year. This mirrored data reported in the CCSF showing that most organizations maintained their spending and portfolio allocations in 2022, as their construction was intentional and long-term oriented. Further, panelists stressed the importance of communication with stakeholders about their strategy, to anchor decision making, and provide consistency that is essential for the nonprofits and projects that they support.
The one asset class that warranted discussion from all panelists was private allocations. Whether it was mission-oriented sustainability projects or a vehicle for diversification and outperformance, both foundations emphasized the role of alternative strategies in their portfolios. As Snyder pointed out, the potential outperformance generated by the illiquidity premium (over public markets) can be critical to replace dollars spent on mission, especially given inflation, as well as administrative fees. He also highlighted that increasing allocations to private asset strategies is a trend Commonfund has seen throughout the nonprofit industry, which is confirmed by the findings of the CCSF study.
Impact and SRI
Both institutions have an impact strategy. McKnight aims to invest in businesses that align with initiatives their program team is also working on, seeking financial, impact, and program returns all at once. This largely comes in to play in their real assets portfolio, with investments in solar, wind, large-scale battery technology, and joint-financing for clean transportation. Madison has tried different strategies, including a separate SRI portfolio, and a recoverable grants model that will allow them to invest directly in the community over time.
McKnight foundation aims to align spending with the mission to act urgently on climate change and take advantage of the discounted value of near-term climate emission reductions for long-term climate outcomes. Therefore the foundation, rather than cutting spending during a down year, is looking at increasing spending both on climate related investments, and for some of their small grantees that would be least able to weather the inflationary environment.
McKnight is in the process of decarbonizing their portfolio, which was an alternative strategy to screening out fossil fuels. With nearly 50 percent of the portfolio being mission-related, a sizeable separate impact portfolio, and a diverse manager program, the foundation is demonstrating both mission alignment and leadership among large philanthropic institutions. The result in terms of performance, McGeveran said, has been neither a drag nor “virtuous fairy dust.”
Ultimately, although both foundations vary in asset size and programmatic focus, they are pursuing impact and values aligned investment strategies that advance the mission of their foundations and strategically allocate capital to their grantees and communities.
Commonfund Institute will continue to explore trends in foundation investment stewardship, including with an upcoming Coffee Talk Series with leaders in the space.
Click here to watch a recent presentation of the CCSF 2022 results, and click here to request a copy of 2022 Council on Foundations-Commonfund Study of Foundations. Watch the recording of the webinar here.