Commonfund has been partnering with boards and investment committees to design and implement investment structures that support and maintain intergenerational equity, the purchasing power of their long-term pools, for more than 50 years.
As part of our commitment to our constituents, we host “Commonfund Convenes” events designed to promote best practices on critical issues that fiduciaries of nonprofit organizations encounter. In this spirit, we recently hosted a meaningful discussion in Charlotte, North Carolina with senior leaders of nonprofits in the region on how endowments are successfully navigating today’s volatile markets.
Below are some of the key highlights
The reality is harsh. Only about 20% of endowments and foundations are achieving intergenerational equity. The vast majority are not, and thus are eroding the purchasing power of their long-term pools over time.
The FY2023 NACUBO-Commonfund Study of Endowments (NCSE), revealed that higher education organizations in the 79th percentile or higher, those that returned 7.6 percent 10-year annualized returns are the only organizations achieving intergenerational equity. Unfortunately, the goal is even further away for foundations and independent schools. The 2023 Council on Foundations-Commonfund Study of Foundations (CCSF)1 reports only those private and community foundations in the 84th percentile, who achieved 7.6 percent annualized returns for the 10-year period, have achieved intergenerational equity. Similarly, the 2023 Commonfund Benchmarks Study of Independent Schools (CSIS)2 reports that only schools in the 80th percentile or higher achieved the necessary 7.6 percent returns over the 10-year period. Fiduciaries of nonprofits have been tasked with a difficult assignment.
While today’s markets are seemingly giving us headwinds in every direction, from Fed policy to interest rates, to inflation, achieving intergenerational equity is still attainable. Below are insights from the top ~20 percent of nonprofits who are maintaining purchasing power for their organizations and supporting their mission through multiple generations.
The common theme we observe is that organizations that rise above the distractions of short-term volatility and sensational headlines—maintaining a focus on long-term strategic issues—are the ones best positioned to achieve intergenerational equity.
Below are some questions for you and your organization to consider
Is Your Institution Driving its Policy?
Strategic Asset Allocation is an output, not an input. We continue to see long-term pools who succeed over market cycles adhere to the Endowment Model. The Endowment Model consists of three parts: 1) an equity bias to drive portfolio growth; 2) diversification within and between asset classes to reduce risks; and 3) the thoughtful use of illiquid investments to capture the liquidity premium, or alpha, associated with private equity markets.
Is Your Endowment Working as Hard as it Needs to for Your Institution?
The primary inputs to a strategic asset allocation are Return Objective, Risk Profile, and Illiquidity Budget. These primary inputs are specific to each institution.
Costs are going up; higher interest rates and inflation can strain long-term portfolios. The changing cost structure may impact your organization’s return objective, risk profile and illiquidity budget. If your organization last revised its investment policy when interest rates were near zero, it may be time to re-evaluate.
Is Your Spend Policy Optimal?
Your institution’s risk profile is also unique to your organization. Consider your distribution requirements, and the “why” behind them. Effective investment committees ask strategic questions that influence the long-term and are not distracted by short-term bumps in the road. This could be evaluating what has changed at your institution, such as student or community needs, donor base, fundraising campaigns. What happens to the restricted fund’s annual spend requirement in a year where your organization may not need the monies? Strong committees adopt a long-term perspective on volatility, spending less time in meetings discussing current market conditions and play the long game.
Is Your Portfolio Diversified Enough?
The most significant lever for generating returns in your organization is likely an allocation to private equity. Fiduciaries should take a thoughtful approach to evaluating this asset class, as it is often misunderstood and requires rigorous stress-testing, liquidity analysis, and ongoing education. The performance gap between top private equity managers and their lower-performing counterparts is substantial, making it essential to access the best managers to justify commitments in this space. This performance dispersion is further complicated by the high fees associated with private equity, leading us to classify it as an “access class” rather than just an asset class. If you can invest with top managers, building a private equity allocation can be well worth the effort. Further, partnering with the right advisor or OCIO can significantly enhance your strategy, contributing positively to intergenerational equity.
Who Governs Governance?
While we have highlighted the importance of managing the strategic direction of your investment policies, it may have been more fitting to start by focusing on the foundational role of strong governance in driving effective committee decisions. Hallmarks of robust governance include an engaged board and staff, regular self-assessments by the board, proactive efforts to increase diversity, deliberate management of leadership transitions, and maintaining discussions centered on strategic oversight rather than day-to-day management. Additionally, strong governance ensures balanced inputs, preventing any single voice—whether the largest donor or the most senior member—from dominating without thoughtful debate. For more examples and data on the impact of good governance on endowments please see our 2021 Commonfund-FGA Benchmarking Study of Governance in Higher Education.
Finally, we believe top-performing institutions can achieve intergenerational equity by concentrating on a few strategic questions, supported by data and thoughtfully deliberated by an engaged Board and staff.
Today, Commonfund has grown to over $28 billion in assets and partners with over 1,600 institutions to help them further their missions. We continue to believe promoting best practices in investment management and governance is essential for the long-term success of nonprofit organizations.
Interested in being a part of the conversation? If you would like to attend one of our events in your area, please complete the form below. A member of our team will reach out to you with dates and locations of where we will be next.
1 As of December 31, 2023. Source: 2023 Council of Foundations – Commonfund Study of Foundations
2 As of June 30, 2023. Source: 2023 Commonfund Study of Independent Schools
