Foundations' Endowed Portfolios Produced Lower Returns in 2022

Longer-term results also eased, according to data from the annual Council on Foundations-Commonfund Study; despite lower returns, spending in support of missions held steady. 

Wilton, Conn. (August 29, 2023) — In the challenging investment environment of 2022, average annual returns on endowed funds declined from the previous year for the 277 foundations surveyed in the annual Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations® (CCSF; the “Study”).  

The average 2022 calendar year return on endowed funds for the 171 private foundations participating in the Study was -12.0 percent, a marked decline from the 16.3 percent return private foundations reported for 2021. Similarly, for the 106 participating community foundations, the average 2022 return was -13.3 percent compared with 14.8 percent in 2021. The average year-over-year declines were the largest for participating foundations of both types since 2008, a year buffeted by the financial crisis and the Great Recession. (All return data are reported net of fees) 

The lower 2022 returns weighed on longer-term returns, which are more meaningful as they reflect foundations’ ability to finance their mission and program commitments going forward. Private foundations’ 10-year average annual returns declined to 7.3 percent in 2022 from 9.7 percent in 2021; Ten-year returns for community foundations fell to 6.4 percent from 9.2 percent a year ago. 

“We are always concerned when we see returns – long or short term – decline. Fortunately, financial markets have generally produced good returns in recent years, so we are hopeful that 2022 will prove to be an anomaly and not a trend. Strong year-to-date results in 2023 give credence to our optimism,” said Kathleen P. Enright, President and CEO of the Council on Foundations, and George Suttles, Executive Director of Commonfund Institute, in a joint statement. Regarding the long term, they observed, “It was just a few years ago that 10-year returns were only slightly above the 5.0 percent level, which is not sufficient to fund grant-making, meet operating expenses and keep up with inflation. Nevertheless, through the challenges of recent years, including the global pandemic and rising inflation, foundations have remained committed to maintaining spending levels in support of their missions.” 

To that point, more foundations in 2022 increased spending than decreased it. Nineteen percent of private foundations and 10 percent of community foundations reported increasing spending versus 5 percent and 6 percent, respectively, that decreased it. 

With 277 private and community foundations, representing combined assets of $119.6 billion, providing data, the CCSF is the most comprehensive annual survey of its kind. The 2022 Study marks the 11th year that Commonfund Institute and the Council on Foundations, two leading organizations in the field of 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 2022 Study follow: 

INTERMEDIATE-TERM RETURNS 

Annualized returns for trailing three- and five-year periods declined in 2022. Private foundations’ average return for the past three years was 5.6 percent, down from 16.0 percent in 2021, while community foundations’ average return for the period was 4.4 percent compared to 15.2 percent a year ago. Roughly equal returns for the first and third years of the period offset each other, with 2020 being positive and 2022 negative, leaving 2021’s strong gain to be averaged out for the period.  

Private foundations reported an average five-year return of 6.0 percent, down from 11.7 percent a year ago; community foundations’ five-year return averaged 4.9 percent versus last year’s 10.8 percent. Although the middle three years of the five-year period produced double-digit gains, they were bracketed by negative returns in 2018 and 2022. 

RETURNS SEGMENTED BY SIZE 

When 2022 results are segmented by size, private foundations with assets over $500 million reported the best relative return at -9.1 percent. All other size/type categories realized losses in the 12.0 percent range except for community foundations with assets under $101 million, which reported a -14.0 percent return. In each of the three size categories, private foundations reported relatively better 2022 returns than their community foundation counterparts.  

Private foundations with assets over $500 million also reported the highest average 10-year returns, at 8.9 percent. Of the remaining size/type categories, only private foundations with assets between $101 and $500 million returned 7.0 percent (although private foundations with assets under $101 million generated an average 6.9 percent for the period). Trailing three- and five-year returns were uniformly positive, albeit at one-third to one-half of the level reported a year ago.  

GROWTH OF RESPONSIBLE INVESTING MODERATES 

Data regarding responsible investing practices and policies were mixed in 2022 compared to the rapid rates of adoption that characterized recent years. For instance, 28 percent of private foundations and 26 percent of community foundations reported currently requiring or permitting investments ranking high on environmental, social, and governance (ESG) criteria in their portfolios. While these were up from last year’s respective 23 and 24 percent, when asked if they were considering adding ESG criteria to their investment policy statement (IPS) in the next 12 months, just 10 percent of private foundations replied in the affirmative, half of last year’s 20 percent, while 34 percent of community foundations replied in the affirmative, just one percentage point lower than last year. Community foundations’ intentions to add socially responsible investing criteria (SRI) to their IPS declined to 15 percent from last year’s 22 percent, while private foundations’ intentions to add SRI fell to 5 percent in 2022 from 15 percent in 2021.  

Even as future intentions seem to moderate, responsible investing has nevertheless grown substantially from expressions of interest into a meaningful presence in many foundations’ IPS. Examples include 18 percent of both private and community foundations requiring/permitting SRI, and 22 percent and 21 percent of private and community foundations, respectively, requiring/permitting impact investing. Twenty-two percent of private foundations and 23 percent of community foundations require/permit investing with diverse managers. 

ASSET ALLOCATION SHOWS LITTLE CHANGE 

In last year’s Study, one allocation showed a five-percentage-point year-over-year change, two changed by three percentage points, and two others moved two percentage points. Not so this year, as institutions looked to replicate the prior year’s winning allocations. All allocations were unchanged or varied by one point, except three-percentage point changes in community foundations’ allocations to non-U.S. equities and alternative strategies. As of December 31, 2022, participating institutions’ asset allocations, and their comparable 2021 allocations, were: 

As has been true in the past, private foundations continued to have a considerably larger allocation to alternative strategies, which was nearly double that of community foundations. 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 are closest in their allocations to non-U.S. equities. The principal alternative strategies are 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 relatively minor within private foundations’ 51 percent alternatives allocation and community foundations’ 27 percent allocation. The only two-percentage-point change was in private foundations’ private equity allocation, which rose to 12 percent (community foundations’ allocation rose to 7 percent from 6 percent). Private foundations’ two largest alternatives allocations were to marketable alternatives and venture capital, 14 percent each, while for community foundations the largest was marketable alternatives at 8 percent. 

GIFTS AND DONATIONS TO COMMUNITY FOUNDATIONS DECLINE 

As public charities, community foundations accept gifts and donations and frequently engage in fundraising. Gifts to these foundations declined for the second time in three years in 2022; while giving was strong in 2021, it was unsettled in 2020 owing to the COVID-19 pandemic. This year presented its own headwinds, chiefly due to poor performance by both stocks and bonds and other strategies and asset classes. Sixty-three percent of participating community foundations said that giving declined in 2022 while less than half of that, 29 percent, said it increased (7 percent reported no change). While the median decrease was 39.6 percent, the more positive data indicated that the median increase was 72.4 percent. 

OUTSOURCING THE INVESTMENT FUNCTION SHOWS INCREASE 

Thirty-six percent of private foundations and 41 percent of community foundations reported using an outsourced investment office to manage their investment portfolio in 2022, up year over year from 34 percent and 37 percent, respectively. The percentage of the investment management function that is outsourced rose among private foundations, to 89 percent from 85 percent, but declined to 90 percent from 93 percent among community foundations.