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Data analysis: Investment decisions by foundations potentially result in losses of $20B a year

Written on Aug 19, 2022

Despite evidence showing that professional money managers who pick stocks, bonds and alternative investments consistently fail to beat the markets, most foundations continue to turn to Wall Street to manage their endowments. 

That strategy could be costly: foundations are giving up an estimated $20 billion a year that could be devoted to charitable purposes, according to the latest data from FoundationMark, a company that tracks the performance of foundation endowments. 

FoundationMark estimates that during the first half of 2022, U.S. foundation assets fell by 17.3%, or about $235 billion, from a record $1.3 trillion at the end of 2021. That drop was caused by falling asset prices, but the performance of professional asset managers who delivered subpar results only made matters worse. 

FoundationMark reports that the investment returns of foundation endowments, taken together, lagged passive market indexes during the declining markets of 2022 as well as during the past one-year, three-year, five-year, and 10-year periods. Most foundation trustees and investment officers would have done better by investing their endowments in low-cost index funds, which simply try to match the performance of broad market sectors. 

The 10-year period is most relevant because foundations invest for the long term. Over that time, the Grantmaker Investment Value Index, which reflects the estimated performance of about 40,000 foundations, returned 6.5% annually. A benchmark portfolio, with 60% invested in U.S. large-capitalization stocks and 40% invested in U.S. bonds, returned 8.5%. 

Foundations together hold slightly more than $1 trillion in assets, so the 2% gap in returns represents about $20 billion a year for all grant makers. For a foundation with assets of $100 million, each percentage point of gain or loss in its investment returns is worth $1 million — the equivalent of 20% of its grant-making budget if the foundation, like many, gives away 5% of its endowment per year.