Investment Returns Improved in 2016, Study Finds

Year-over-year investment returns (net of fees) for private and community foundations stabilized after consecutive years of falling or flat growth, a study by the Commonfund Institute and the Council on Foundations finds.

Based on survey data from one hundred and twenty-three private foundations and eighty community foundations, the 2016 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations found that private foundations reported an average return of 6.4 percent for the fiscal year ending December 31, 2016, up from 0.0 percent in FY2015, while community foundations reported an average return of 7.3 percent, up from -1.8 percent. Return data by asset class showed that U.S. equities generated the highest return for foundations of both types studied, followed by short-term securities/cash/other, alternative strategies, non-U.S. equities, and fixed income. Although FY16 returns were the highest in three years for both private and community foundations, the average FY16 return for private foundations lagged their trailing five-year average by 120 basis points, while the average community foundation return equaled the trailing five-year average.

The study also found that the effective spending rate among participating private foundations rose to 5.8 percent, compared with 5.4 percent in FY15, while the effective spending rate for community foundations fell slightly to 4.7 percent, from 4.8 percent. Spending rates by asset size were mixed, with 60 percent of private foundations with assets in excess of $500 million reporting an increase in spending, up from 50 percent last year, and 42 percent of community foundations in the same size category reporting increased spending, compared with 50 percent in 2015. Spending rates declined for private foundations in the other two categories, rose for community foundations in the $101 million to $500 million range, and was unchanged on a year-over-year basis for community foundations with assets of less than $101 million in assets.

"Investment returns for 2016 are encouraging, but deliver a mixed message: It is heartening to see improved investment performance, especially given its implications for ongoing mission support. But with trailing ten-year returns averaging 4.7 percent for participating private foundations and 4.6 percent for community foundations, long-term results are not sufficient to maintain the corpus of foundations' endowments after spending, inflation, and costs," said COF president and CEO Vikki Spruill and Commonfund Institute executive director William F. Jarvis in a joint statement. "Over the past ten years, community foundations' returns roughly equal their 2016 effective annual spending rate, but do not offset the effect of inflation and costs. Private foundations’ ten-year investment returns are a hundred and ten basis points lower than their 2016 effective spending rate, and, if continued, this could be a concern over the long term."

"National Foundation Study Shows Improved 2016 Investment Returns." Commonfund Institute Press Release 07/14/2017.