Charities, Foundations Show 'Strength and Stability' in 2004 Performance

June 9, 2005 ( - US charities and foundations turned in a respectable average annual return of 11.4% during FY 2004, despite being down from the 17% performance a year before, according to newly released data.

A news release said the Commonfund Benchmarks Study – Foundations and Operating Charities 2005 found that smaller foundations ($10 – 500 million in assets) generally outperformed their bigger counterparts ($501 million – $1 billion in assets). The average reported three-year return was 7.5%, and the five-year figure was 3.9%, according to the announcement.

“The performance of foundations in 2004 shows strength and stability as the markets recovered from three very difficult years (FY 2000-2002),” said John Griswold, Jr., executive director, Commonfund Institute, in the news release. “Many foundations reported increases in alternative investments, and should continue to enjoy respectable returns assuming improved diversification, due diligence and good corporate governance.”

Average asset allocations in FY 2004 were similar to the previous year. Domestic equities declined to 45% from 48%. Within that category, large cap allocations were 59% in FY 2004 vs. 61% FY 2003; mid cap at 9% (no change from previous year); small cap at 15% vs. 14%; and Index at 17% vs. 16%.

There were also modest changes in allocations to fixed income, international equities and cash. Foundations reduced allocations to domestic bonds (82% vs. 88% the previous year), and stepped up allocations to global bonds (8% vs. 4%). In International Equity, there were modest reductions in allocations to Active MSCI (76% vs. 79%), and modest increases in Passive MSCI and Emerging Markets, according to the announcement.

Interest in Alternatives Grows

Foundations reported a significant increase in average allocations to alternative strategies over the previous year (18% vs. 14%). Within alternatives, hedge fund allocations increased to 50% from 42% among foundations in all size groups. Multi-strategy hedge funds were used most frequently, followed by long/short equity with 52% and absolute return with 45%. The largest foundations ($1 billion or more) generally used more hedge funds strategies than smaller foundations, the announcement said.

Three quarters (72%) of hedge fund assets were invested directly. The average number of hedge fund managers used was 6.8, ranging from 16 at the largest foundations to just under three at the smallest foundations.

Looking at other areas, more than half (57%) of all foundations reported increases in gifts. Among the largest foundations, 75% reported gift increases. One-third reported no change.

Overall, foundations reported the average size of the investment committee was 6.6 members vs. 6.3 the previous year. There were no significant variations by foundation size.A large majority (87%) of foundations overall reported having conflict of interest policies for their Investment Committee members. All large foundations (100%) and 81% of small foundations reported having these policies, according to the data.

The Commonfund Benchmarks Study – Foundations and Operating Charities 2005, sponsored by the Commonfund Institute, surveyed 317 leading independent/private community foundations and operating charities throughout the US with total of nearly $167 billion.   The study was conducted through telephone interviews during the fourth quarter 2004 and first quarter 2005.