Foundation, Operating Charity Investment Turn Negative

Two companion studies of the nonprofit sector show that investment returns were slightly negative in FY2011 after increasing in the range of 12 percent during FY2010 and 21 percent in FY2009.

The average FY2011 total net return reported by the 179 independent/private foundations and community foundations participating in the 2012 Commonfund Benchmarks Study® of Foundations was -0.9 percent compared with 12.5 percent in FY2010 and 20.9 percent in FY2009 (all returns are net of fees).

Meanwhile, for FY2011 the 68 operating charities — comprising cultural, religious and social service institutions — participating in the 2012 Commonfund Benchmarks Study® of Operating Charities reported an average net return on investment funds of -1.8 percent compared with 11.6 percent in FY2010 and 21.5 percent in FY2009.

The 2011 results mark the first time since FY2008 that foundations and operating charities have reported negative returns. Return and all other data in the studies were for calendar 2011 (January 1, 2011 to December 31, 2011).

The average three-year return for participating foundations was 10.5 percent, a significant improvement from last year’s -0.3 percent, reflecting the fact that the negative 26 percent return for FY2008 was no longer part of the calculation. The FY2008 return did enter the five-year calculation, however, with the result that the five-year net return fell to 1.5 percent from 4.2 percent in last year’s study.

For the past 10 years, participating foundations reported an average annual return of 5.2 percent, little changed from the average of 5.1 percent reported last year. For operating charities, three-year returns averaged 10.0 percent, up from 0.1 percent the year before; five-year returns averaged 1.8 percent, down from 4.7 percent last year; and the 10-year returns averaged 5.5 percent, up from 4.9 percent last year.

According to John S. Griswold, executive director of the Commonfund Institute in Wilton, Conn., which sponsors the studies. “2011 was a frustrating year for foundations and operating charities. On top of the negative investment returns, the addition of inflation and investment management costs means that these institutions fell a little farther behind financially, even before spending for mission support. It’s fortunate that this year was preceded by the two strong years of FY2009 and FY2010. We are also encouraged by the fact that gifts and donations to operating charities rose again in FY2011, even though giving remained less than robust.”

Among operating charities, 26 percent of participating institutions reported an increase in gifts received in FY2011, a marked improvement over the 10 percent that reported an increase in gifts in FY2010. Just 12 percent of participating institutions reported a decline in gifts received in FY2011, compared with 17 percent in FY2010. Forty-nine percent of operating charities reported no change.

Spending in dollar terms was mixed, strengthening among foundations but slipping modestly among operating charities. Fifty percent of participating foundations reported higher spending in dollars in FY2011 compared with 38 percent in FY2010. Underscoring the improvement in spending, just 25 percent of foundations reported decreasing their spending in dollars, down from 43 percent in FY2010. Thirteen percent reported no change in spending. Among operating charities, 30 percent reported increasing their spending in dollars, up from 25 percent the year before. While 35 percent reported a decrease in spending in dollars, this was down sharply from 49 percent in FY2010. Twenty-two percent reported no change versus 19 percent last year.

The 179 participating foundations of the Commonfund Benchmarks Study®Foundations Report represented a combined $100.4 billion in assets, comprising 133 independent/private foundations and 46 community foundations.

Independent/private foundations reported average net investment returns of -0.7 percent, while community foundations reported average returns of -1.4 percent.

When viewed by asset class, returns were mixed. The highest return, 5.7 percent, came from fixed income; the lowest, -12.2 percent, came from international equities. Domestic equities returned -0.1 percent, alternative strategies gained 2.0 percent, and the return for short-term securities/cash/other was-0.1 percent.

Within the broad alternative strategies asset class, the highest returns were generated by venture capital, at 14.2 percent; private equity real estate (non-campus), at 9.2 percent; and private equity, at 8.9 percent. Distressed debt also produced a positive return, 2.6 percent. Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short 130/30, event-driven and derivatives) returned -2.3 percent. Energy and natural resources, commodities and managed futures returned -0.7 percent; within that larger category, the sub-category of commodities and managed futures returned -7.9 percent.

Asset Allocation

At December 31, 2011, participating institutions’ asset allocations were: Domestic equities: 24 percent; Fixed income: 13 percent; International equities: 12 percent; Alternative strategies: 43 percent; and Short-term securities/cash/other: 8 percent.

The average annual effective spending rate reported by Foundation Study participants was 5.5 percent, down from 5.8 percent a year ago. When viewed by size, foundations with assets between $101 and $500 million had the highest effective spending rate, 5.8 percent, while foundations with assets under $101 million had the lowest, 4.9 percent. When viewed by type of institution, independent/private foundations and community foundations had the same effective spending rate, 5.5 percent.

The average debt load reported by participating foundations showed a sharp decline year over year, falling to $47.3 million from $67.4 million. The median debt load also declined, reaching $12.5 million compared with $18.5 million in FY2010. Seven percent of participating institutions reported increasing debt in FY2011 compared to 40 percent that reported decreasing debt.