DATELINE: June 25, 2009, Chicago
Today, the Commonfund released a benchmark study that provides statistics on foundation investment performance. Two hundred Ninety (290) private and community foundations responded. The average return on investments for the 2008 calendar year was...
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-26%. That is net of fees, which means the actual reduction in investment assets was steeper. For the 2007 calendar year, the average return for the benchmark survey was 9.9%.
There is some correlation between size and investment performance. Those institutions with over $1 billion in assets had a -24.8 return during 2008, while those with between $101 million and $500 million in assets had a -26.8 return. Those with between $10 million and $50 million had a -28.5%. Overall, all categories exhibited poor performance.
All asset classes exhibit negative returns in 2008 except for fixed income, which provided a .6% average return. International equities took the hardest hit, returning -41%, but U.S. equities were not far behind at -36.3.
Interestingly, venture capital and private equity returned -6.2% and -7.8% respectively. That ostensibly supports the argument for these types of investments, but two issues need to be addressed before arguing that alternative investments are the way to go. First, we’d like to know the valuation techniques used to arrive at these returns. There is not much room for game playing when calculating returns on marketable securities. We’d like to know how and who is calculating these investment returns.
Second, there have been widespread reports of institutions that invested heavily in alternative investments experiencing severe liquidity problems. In yesterday’s Wall Street Journal, there was an article on the two hedge funds that have refused to return investor dollars. Lockups and provisions that limit ready access to funds are creating potential unrelated-debt financed income problems for some institutions. No institution should ever underestimate the cost of illiquidity. Not being to convert assets into cash isn’t a problem when markets are going up and all revenue sources are increasing. Investment committees should not minimize the impact of downturns and the additional demands they create. Despite liquidity considerations, between 2007 and 2008, the asset allocation to alternative investments increased from 28% to 36%. It will be interesting to watch the trend in that number over the next several years.
The use of alternative investments is highly correlated with size. Institutions with assets over $1 billion show the signs of addiction, with 42% of their portfolios allocated to alternative investments while those with assets between $10 million and $50 million report a 20% allocation. Interesting, institutions in the next category up ($51 million to $100 million) report a slightly lower allocation at 17%.
In terms of the mix of alternative investments, all size categories clearly have a preference for marketable alterative strategies, with this category, on average, accounting for 40% of alternative investments. Venture capital, private equity, distressed debt, energy and natural resources, and private equity comprise the other categories of alternative investments.
Senator Grassley and some of his colleagues complain about foundation spending rates. The average spending rate increased from 5.5% in 2007 to 5.8% in 2008. It would be interesting to know whether this reflects increased spending or is tied to a decline in assets. The study points out that 45% of the respondents increased their dollar spending on average 20.4%.
The Commonfund does not identify the participating foundations by name. As a general proposition that is fine, but we’d like to know whether the Bill and Melinda Gates Foundation is one of the participating respondents. We have seen one study where the numbers were reported with and without the Gates Foundation. We think all studies should either take that approach or exclude the Gates Foundation. We have nothing against the Gates Foundation, but given their size, they have the potential to skew survey results to the point where the results become meaningless if the user wants to see what foundations are doing by head count rather than by assets.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
| THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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