Foundations, especially small ones, fared worse than the broader stock market last year

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The country’s private foundation endowments recorded their third consecutive year of double-digit investment gains in 2021, posting an average gain of 16.3%, a rate of return that was not as high as the 29% achieved by the benchmark Standard & Poor’s 500. index, according to research released Wednesday. Community foundations saw their assets increase by an average of 14.8%.

But wealthier foundations have done much better, largely because they shifted more of their assets from stocks to 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 of endowment investing for private and community foundations.

According to George Suttles, executive director of the Commonfund Institute, these gains should cushion some of the foundation endowment setbacks suffered in the first half of this year.

That said, he and other experts say the performance could cause some foundations to withdraw their grants due to uncertainties in the stock market and economy.

“Being able to roll into 2022 on a relatively good market year for private and community foundations is going to be helpful,” given the damage that market turbulence and higher levels of inflation have had on foundation endowments.

Impact of inflation

In the first six months of the year, foundation assets fell 17.3%, or about $235 billion, according to data compiled by FoundationMark, a company that tracks the performance of foundations. Those losses were compounded by higher inflation, Suttles said, which reduces the purchasing power of the foundation’s grants. The consumer price index, a measure of inflation, has hovered around 2-3% in recent years, but now stands at 8.5%.

Many foundations typically add a measure of inflation like the CPI to the federal requirement that they distribute at least 5% of their assets to charity each year to help guide their grantmaking budget. When the CPI is 2%, it means that foundations must generate a return on investment of 7% to cover inflation and the payment required to maintain their existence in the future without eroding their endowment.

“With declining purchasing power and volatility in financial markets, it will be difficult for private and community foundations to meet their short-term return target in 2022,” Suttles said. “The confluence of these two things that could potentially negatively impact grantmaking this year.”

While Suttles said he expects some foundations to be reluctant to make new multi-year commitments and consider cutting existing grantmaking budgets, he also predicts some foundations will increase the amount they give in grants, even if their assets suffer because the non-profit organizations they support are particularly vulnerable. in times of economic hardship.

The study, which was based on data from 149 private foundations and 82 community foundations, showed that funders came very close to meeting the 5% minimum payment requirement. Private foundations, on average, directed 5.1% of their assets to charitable causes, and community foundations, which have no minimum payout, directed 4.6% of their assets to charity. Community foundation data reflects only endowments held by foundations and does not include funds advised by the donors they oversee.

Concerns of Nonprofit Organizations

Dave Biemesderfer, president of the United Philanthropy Forum, a network of foundations and philanthropic membership organizations, says he’s heard from a growing number of charities that foundations are concerned about the state of their endowments and will reduce their grant budgets over the next year.

“In times of greater economic uncertainty, nonprofits face even more challenges and face greater needs,” he says. “And so if anything, this should be a time when foundations are even increasing their giving.”

To allay those fears, Suttles of the Commonfund Institute points to record gains in longer-term investments in foundations. Over the past 10 years, the annualized rate of return was 9.7% for private foundations and 9.2% for community foundations, nearly doubling the 10-year gains reported in 2017. See investment returns at a longer time horizon, Suttles said, might allow foundation leaders to resist the urge to forego grantmaking.

“Often the right answer is to stay the course,” he said.

The study also found that funders are looking to expand the list of investment professionals they use.

The number of private foundations seeking to employ diverse investment managers, based on race, gender, ethnicity and other factors, rose from 11% to 17% last year. In community foundations, 23% said they do, compared to 13%.

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