Foundations' Endowed Portfolios Produced Higher Returns in 2023

One-year returns recovered, OCIO use increased, gifts and responsible investing moderated

Wilton, Conn. (September 4, 2024) — In the improved market environment of 2023, average annual returns on endowed funds bounced back from the previous year for the 291 foundations surveyed in the annual Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations® (CCSF; the “Study”).

The average 2023 calendar year return on endowed funds for the 182 private foundations participating in the Study was 12.6 percent, a marked increase from the -12.0 percent return reported for 2022. Similarly, for the 109 participating community foundations, the average 2023 return was 14.1 percent compared with -13.3 percent in 2022. Returns for both foundation segments swung more than 20 percentage points for the second year in a row (all return data reported net of fees).

The rebounded 2023 returns bolstered longer-term returns, which reflect foundations’ ability to finance their missions and program commitments going forward. Ten-year average annual returns remained steady at 7.1 percent (from 7.3 percent) for private foundations and 6.2 percent for community foundations (from 6.4 percent) in 2023.

“Despite year-to-year volatility in the markets, this year’s report shows what we know to be true: private and community foundations are primed and positioned for the long term, and it pays off,” Kathleen Enright, President and CEO of the Council on Foundations, and George Suttles, Executive Director of Commonfund Institute, said in a joint statement. Citing steady long-term returns, consistency in asset allocation, and level spending, they said, “We will continue monitoring how institutions respond to these challenges, but we remain confident in the ability of foundations to support their communities, through ups and downs, in the years to come.”

With data reported by 291 private and community foundations, representing $126.0 billion in combined assets, the CCSF is the most comprehensive annual survey of its kind. The 2023 Study marks the 12th year that the Council on Foundations and Commonfund Institute, two leading organizations in foundation investment and governance policies and practices, have partnered to produce this research. The Study reports data from private and community foundations separately to reflect the differing structures of the two foundation types and, for deeper analysis, also breaks both types into three cohorts segmented by endowment size.

Additional highlights from the data collected and analyzed in the 2023 Study follow:

INTERMEDIATE-TERM RETURNS

Annualized returns for the trailing three- and five-year periods were mixed in 2023. Private foundations reported an average three-year return of 4.9 percent, down from 5.6 percent in 2022, while community foundations reported an average return for the same period of 4.5 percent compared to 4.4 percent. Roughly opposite one-year returns for the most recent two years offset each other, with 2023 being positive and 2022 negative to a similar magnitude, leaving 2021’s gain to be averaged out for the three-year period.

Five-year average annual returns saw a significant positive jump for private foundations to 9.5 percent from 6.0 percent in 2022 but were still below 11.7 percent reported in 2021. That rate for community foundations rose to 8.8 percent from 4.9 percent in 2022, likewise shy of the reported 10.8 percent five-year return in 2021.

RETURNS SEGMENTED BY SIZE

When 2023 results are segmented by foundation size, community foundations with assets under $101 million reported the best relative return at 15.1 percent, followed by community foundations with assets between $101-$500 million with average annual returns of 13.8 percent. By comparison, private foundations with assets under $101 million and those between $101-$500 million gained 13.4 percent and 13.0 percent in annual returns, respectively. Meanwhile, private foundations with assets over $500 million reported annual average returns of 10.0 percent, and community foundations of the same size reported 12.7 percent. In a reversal from last year, in each of the three size categories, community foundations reported relatively higher 2023 returns than their private foundation counterparts on average.

Despite the lowest average one-year returns, private foundations with assets over $500 million reported the highest average 10-year returns at 9.2 percent. All other size/type categories reported 10-year returns between 6.1 percent (community foundations with assets below $101 million) and 6.8 percent (private foundations with assets between $101-$500 million). Trailing three-year returns were all in the 4.0-4.9 percent range across size/type categories, except for the largest private foundations reporting 6.6 percent on average. A similar distribution was reported for five-year returns, which clustered in the 8.7-9.2 percent range across size/type categories with the exception, again, of private foundations with assets over $500 million reporting 10.8 percent on average.

ASSET ALLOCATION SHOWS LITTLE CHANGE

In last year’s Study, all allocations were unchanged or varied by one percentage point, except for one three-percentage point change. This year showed slightly more variability in year-over-year allocations: one allocation shifted five percentage points from the prior year (see private foundations’ alternative strategies allocation), one changed by three percentage points, and one other moved by two percentage points. All other changes landed within one percentage point of the prior year's average. As of December 31, 2023, participating institutions’ asset allocations, and their comparable 2022 allocations, were: 

As in the past, private foundations continued to have a considerably larger allocation to alternative strategies, although that gap narrowed slightly in 2023. Also remaining in place was community foundations’ greater allocations to U.S. equities and fixed income. Aside from short-term securities/cash/other, the two foundation types were closest in their allocations to non-U.S. equities. There was a wide dispersion in allocations between size/type categories. For instance, within private foundations, those with assets over $500 million had an alternative strategies allocation of 53 percent, compared with those with assets under $101 million that reported a 21 percent allocation. For community foundations, alternative allocations for those with assets over $500 million were 28 percent on average compared with 11 percent for those with assets under $101 million. 

Within alternative strategies, the largest allocations were private equity and marketable alternatives. The former includes U.S. and international private equity, venture capital, private credit, private real estate, and energy and natural resources. The latter includes hedge funds, absolute return, market neutral, long/short, 130/30, event-driven, and derivatives. 

Changes to year-over-year allocations to various sub-strategies were minor. Private foundations on average showed two two-percentage-point changes in allocations, with private equity falling to 10 percent and venture capital falling to 12 percent. Private foundations’ two largest alternative allocations were still to marketable alternatives and venture capital, at 13 percent and 12 percent, respectively. All of community foundations’ alternatives allocations landed within one percentage point of the prior year, with the largest allocations to private equity and marketable alternatives, each with 8 percent on average.

GIFTS AND DONATIONS TO COMMUNITY FOUNDATIONS DECLINE

As public charities, community foundations accept gifts and donations and frequently engage in fundraising. For the second year in a row, more than half of participating community foundations reported a decrease in gifts and donations in 2023. Despite a positive market year, gifts can be a lagging indicator, in which case last year’s poor performance would factor into 2023 figures, in addition to other headwinds such as inflation. Just over half, or 51 percent, of participating community foundations said that giving declined in 2023 (compared with 63 percent in 2022), while 36 percent said it increased (29 percent in 2022). While the median decrease in gift size was 35 percent, the more positive data indicate that the median increase was 74 percent.

GROWTH OF RESPONSIBLE INVESTING MODERATES

Data regarding responsible investing practices and policies were mixed in 2023 compared to the rapid rates of adoption that characterized recent years. For example, 27 percent of private foundations and 26 percent of community foundations reported requiring or permitting investments ranking high on environmental, social, and governance (ESG) criteria in their portfolios. While these were essentially unchanged from last year’s respective 28 and 26 percent, when asked if they were considering adding ESG criteria to their investment policy statement (IPS) in the next 12 months, just 7 percent of private foundations replied in the affirmative (compared to 10 percent last year and 20 percent in 2021). For community foundations, 16 percent reported considering adding ESG to their IPS, fewer than half the 34 percent that replied in the affirmative in 2022.

Even as future intentions seem to have moderated, responsible investing has nevertheless grown substantially from expressions of interest into a meaningful presence in many foundations’ IPS. For example, roughly one-fifth of all private and community foundations required or permitted impact investing and diverse manager programs in 2023.

OUTSOURCING THE INVESTMENT FUNCTION SHOWS INCREASE

Thirty-nine percent of private foundations and 43 percent of community foundations reported using an outsourced investment office to manage their investment portfolio in 2023, up year over year from 36 percent and 41 percent, respectively. The percentage of the investment management function that were outsourced rose among private foundations to 90 percent from 89 percent and among community foundations to 92 percent from 90 percent.