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Study: Smaller foundations fared worse than overall stock market in 2021

Written on Sep 13, 2022

Endowments at the nation’s private foundations enjoyed their third straight year of double-digit investment gains in 2021, posting an average gain of 16.3%, a rate of return that was not nearly as strong as the 29% achieved by the benchmark Standard & Poor’s 500 index, according to a new study. Community foundations saw assets increase 14.8%, on average. 

But wealthier foundations did much better, in large part because they shifted a larger share of their assets from equities into venture capital, hedge funds, and other approaches. Foundations with more than $500 million in assets achieved an average return of nearly 22%, according to the Council on Foundations-Commonfund Study on Investment of Endowments for Private and Community Foundations. 

Those gains should buffer some of the setbacks foundation endowments experienced during the first half of this year, according to George Suttles, executive director of the Commonfund Institute. 

That said, he and other experts say the performance could cause some foundations to pull back on grants out of concern about uncertainties in the stock market and the economy. 

During the first six months of year, foundation assets fell by 17.3%, or about $235 billion, according to data compiled by FoundationMark, a company that tracks the performance of foundation endowments. Those losses have been compounded by higher inflation which reduces the purchasing power of foundation grants. The Consumer Price Index (CPI), a measure of inflation, has hovered around 2 to 3% in recent years but now sits at 8.5%. 

Many foundations generally add an inflation measure like the CPI to the federal requirement that they distribute at least 5% of their assets to charity each year to help guide their grant-making budget. When the CPI is 2%, that means that foundations must generate a 7% investment return to cover inflation and the required payout in order to sustain their existence into the future without eroding their endowment. 

While it is expected that some foundations will hesitate to make new multiyear commitments and consider cutting existing grant budgets, some foundations will increase the amount they give in grants, even if their assets take a hit because the nonprofits they support are especially vulnerable during challenging economic times. 

The study, which was based on data from 149 private foundations and 82 community foundations, showed that grant makers hewed very close to the minimum 5% payout requirement. Private foundations, on average, directed 5.1% of their assets to charitable causes, and community foundations, which do not have a minimum payout, directed 4.6% of their assets to charities. The community-foundation data only reflects endowments held by the foundations and does not include donor-advised funds they oversee. 

To reduce risk, foundations typically spread their endowment investments in portfolios that can include publicly traded equities, bonds, private equities, and other investments such as real estate. The report includes the rate of return in 2021 for 14 investment indices or bonds. Private foundations outperformed six of those measures. Among the examples the report noted: the MSCI Emerging Markets Index, which posted a negative 2.5% return, almost 19 percentage points behind the average rate of return for private foundations. 

The study also found that grant makers are seeking to expand the roster of investment professionals they use. 

The number of private foundations that seek to use diverse investment managers, based on race, gender, ethnicity, and other factors, increased from 11% to 17% last year. At community foundations, 23% reported doing so, up from 13%.