Foundation Investment Returns Fell Significantly in 2018, Study Finds

Foundation Investment Returns Fell Significantly in 2018, Study Finds

Year-over-year investment returns (net of fees) for private and community foundations fell into negative territory in 2018 after posting double-digit gains in 2017, a study by the Commonfund Institute and Council on Foundations finds.

Based on survey data from two hundred and thirty-six private and community foundations, the 2018 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations found that private foundations reported an average return of -3.5 percent, down from 15 percent in 2017, while community foundations reported an average return of -5.3 percent, down from 15.1 percent in 2017. The 2018 returns were the lowest since 2008, pushing down trailing three-year average returns to 6.1 percent for private foundations and 5.6 percent for community foundations. Return data by asset class showed that short-term securities/cash produced the best return in 2018 for both private and community foundations, while non-U.S. equities, which generated the highest return in 2017, fared the worst, followed by U.S. equities.

The study also found that the effective spending rate among participating private foundations remained unchanged, at 5.7 percent, but declined moderately for community foundations, to 4.6 percent from 4.8 percent. Among private foundations with assets of more than $500 million, the rate was all but unchanged (5.2 percent, compared with 5.3 percent in 2017), while for community foundations in that cohort, the rate fell to 4.7 percent, from 5.5 percent. Spending in dollar terms increased in 2018, albeit not as sharply as in 2017, with 53 percent of private foundations (down from 57 percent in 2017) and 52 percent of community foundations (down from 56 percent) reporting increases, and 34 percent of private foundations (up from 30 percent) and 29 percent of community foundations (up from 22 percent) reporting declines.

With financial markets uncertain and the impact of the Tax Cuts and Jobs Act of 2017 on charitable giving inconclusive, contributions in 2018 were mixed, with 55 percent of community foundations reporting an increase (up from 49 percent in 2017), while 36 percent reported a drop (up sharply from 22 percent).

"Financial markets were choppy in 2018, at times performing well but at others — particularly the fourth quarter — [reflecting] a range of investor concerns. It was the uncertain environment that ultimately produced negative returns for many portfolios," said Commonfund president and CEO Mark Anson. "If there was an encouraging sign for participating foundations, it was the increase in trailing ten-year returns to an average of 8.4 percent for private foundations and 8.2 percent for community foundations. These compare to last year's trailing ten-year returns of 5.5 percent and 5.3 percent, respectively. The higher returns — in excess of 8 percent — are needed to maintain the corpus of foundations' endowments after spending, inflation, and costs."

"Foundations — in fact all organizations in the nonprofit sector — need to embrace the best financial stewardship practices," said Council on Foundations president and CEO Kathleen P. Enright, "in order to create sustainable organizations that can fulfill their missions over the long term."