John S. Griswold, Executive Director of Commonfund Institute, pointed out in a press release that foundations participating in the study reported their average annual return objective was 8.5% and that the most frequently cited return objective – reported by 44% of survey respondents – was in the range of 8% to 8.9%. “While 2007’s results were down considerably from 2006, a 9.9% return should cover the average foundation’s spending, inflation and costs, enabling it to continue to support its programs and missions,” he said in the announcement.
Among asset classes, the highest reported returns, averaging 21%, were in energy and natural resources strategies. Other leading asset class returns were: international equities, 15.9%; private equity, 14.7%; private equity real estate, 13.8%; marketable alternative strategies, 12.3%; venture capital, 11.1%; and distressed debt, 10.3%.
International equity returns were sharply down from 25.1% in FY2006. Domestic equities returned only 7.5% in FY2007 compared to 14% last year. In contrast, fixed income returns rose to an average of 6.9%, up from 4.7% in 2006.
Participating foundations reported average asset allocations of 32% to domestic equities; 15% to fixed income; 20% to international equities; 28% to alternative strategies; and 5% to short-term securities and cash.
Average three-year returns declined to 10.8% from 11.3% a year ago, but average five-year returns jumped to 13% from 9% last year due to the removal of 2002’s -8.7% return from the calculation.
The 300 foundations in the study comprise 226 independent/private foundations and 74 community foundations, representing combined assets of nearly $195 billion.
Top decile institutions in the 2008 Commonfund Benchmarks Study of Foundations had investment returns averaging 16.7%, while top quartile institutions' returns averaged 14.2% - down from 18.5% and 17.1%, respectively, last year. Top decile institutions allocated 40% of their assets to alternative strategies and the top quartile allocated 37% to alternative strategies, compared with 28% for the study population overall.
Conversely, the Benchmarks Leaders have smaller allocations to domestic equities and fixed income securities, and are roughly even with the entire study population in their international equities allocation.
Other study findings, according to the press release, include:
- The alternative strategies allocation for foundations grew to an average of 28% from 23% last year while the allocation to short-term securities and cash fell to 5% from 8% a year ago.
- All other asset class allocations were modestly lower or level with last year.
- Larger institutions have higher allocations to alternative strategies and smaller foundations have higher allocations to domestic equities and fixed income. Foundations with assets in excess of $1 billion allocated the most to alternative strategies - an average of 30%, up from 25% a year ago - and they funded the increase almost entirely from short-term securities and cash, which was reduced to 5% this year from 10% last year.
- Eighty-five percent of participating institutions reported rebalancing their investment portfolios during FY2007, up modestly from 82% in FY2006. Twenty percent of foundations reported that they rebalance quarterly and 16% reported rebalancing annually.
- Among community foundations, 51% reported increased gift flow in FY2007, while 32% reported a decrease.