Year-over-year investment returns (net of fees) for private and community foundations fell in 2015 for the second straight year, a study by the Commonfund Institute and the Council on Foundations finds.
Based on survey data from 130 private foundations and 98 community foundations, the 2015 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations found that private foundations reported an average return of 0.0 percent for the fiscal year ending December 31, 2015, down from 6.1 percent in FY2014, while community foundations reported an average return of -1.8 percent, down from 4.8 percent. Private foundations performed better than community foundations across all asset classes except alternative strategies, with private foundations reporting an average -2.2 percent return, compared with -2.1 percent for community foundations.
The study also found that private foundations performed better than community foundations across all size categories. Private foundations with assets of more than $500 million, for example, generated an average return of 1.1 percent, compared with -1.5 percent for similarly sized community foundations, while those with assets of between $101 million and $500 million reported an average return of -0.5 percent, compared with -1.9 percent for similarly sized community foundations, and those with assets of less than $101 million generated an average return of 0.1 percent, compared with -1.8 percent for community foundations. While similar patterns held for average three-, five-, and ten-year returns, the gap between private and community foundations narrowed as the time period lengthened. For the trailing three-year period, for instance, private foundations registered an average return of 6.9 percent, compared with 5.7 percent for community foundations, while for the trailing five-year period, their respective average returns were 6.3 percent and 5.7 percent, and for the trailing ten-year period, 5.5 percent and 5.2 percent.
In addition, the study found that the effective spending rate held steady in 2015 at an average of 5.1 percent for all respondents, 5.4 percent for private foundations, and 4.8 percent for community foundations — and ranged from 4.4 percent for community foundations with assets of less than $101 million to 5.7 percent for similarly sized private foundations. Despite weak investment returns, the report notes, 51 percent of private foundations and 57 percent of community foundations reported an increase in spending in dollar terms in 2016.
"The message of this study is clear. Foundations are continuing to invest in their missions and maintain consistent spending. The question this study raises, however, is the long-term impact on endowment values if foundations do not experience more favorable investment returns in the near- and mid-term," said Vikki Spruill, president and CEO of the Council on Foundations, and William F. Jarvis, executive director of Commonfund Institute, in a joint statement. "Two years of low investment results have reduced foundations' trailing ten-year returns to the 5.1-5.9 percent range. Without higher long-term returns, it will be difficult for foundations to maintain their endowments once annual spending, inflation, and investment management costs are taken into account. Foundations of both types have shown commitment to supporting their missions in a very tough investment environment."