Foundations FY06 Returns Significantly Higher than FY05

June 12, 2007 ( - U.S. independent/private and community foundations reported an average annual return of 13.7% in Fiscal Year 2006 compared to 7.9% in Fiscal Year 2005, according to the Commonfund Benchmarks Study 2007 Foundations Report.

A news release of the top findings of the study said average returns ranged from 15.6% for the largest institutions ($1 billion or more in endowment assets) to 12.4% for the smallest foundations (assets between $51 million and $100 million). The Benchmarks Leaders – foundations with the highest average returns – reported average annual returns of 18.5% for the top decile and 17.1% for the top quartile.

Average returns by institution type were 13.7% for independent/private institutions and 13.6% for community foundations, the release said. The study found the top asset class contributors to overall returns were international equities (25.1%) and energy and natural resources (17.6%).

Average three-year and five-year returns for all institutions were 11.3% and 9.0% respectively, and the average reported return assumption for the next three to five years is 8.5%.

Asset Allocations

“Foundation investment performance improved significantly last year due to more favorable market conditions and continuing increases in allocations to international equities and alternative investments,” said John S. Griswold, Jr., Executive Director, Commonfund Institute, in the news release. “These strategies should continue to help foundations to achieve respectable returns when combined with proper diversification, due diligence and good management practices.”

In FY06 foundations continued trends observed in previous years. Average domestic equities allocations continued their decline to 33% in FY06 versus 36% in FY05. Among domestic equities, the study found 75% are actively managed and 25% are passively managed.

Average fixed income allocations declined to 16% in FY06, compared to 18% the previous year. Alternative strategies increased to 23% from 21%; international equities rose to 20% from 18%; and cash/short term investments bumped up to 8% from 7%.

Foundations in general reported they expect to increase allocations to international equity and alternative strategies, and decrease allocations to domestic equity, fixed income and short term/cash in FY07.

The top-decile and top-quartile performers in the Benchmarks Leaders group differed significantly from total Study participants in their asset allocation. Benchmarks Leaders in the top quartile reported higher allocations to alternatives (28%) and international equities (22%) compared with total institutions, and lower allocations to domestic equities (30%), fixed income (15%) and short term/cash (5%).   Top decile institutions had even higher allocations to international equities (24%) and alternatives (30%) than total institutions, and lower allocations to domestic equities (28%), fixed income (14%) and short term/cash (4%).

Alternative Strategies

Within alternatives, hedge funds predominated with average allocations at 46%. Institutions with $101-$500 million in endowment assets reported the highest average hedge fund allocation of 62%. The reasons cited most frequently for using hedge funds were portfolio diversification (37%) and downside risk protection (33%).

Private equity allocations were 17% of the alternatives allocation; private equity real estate was 12% of alternatives, energy and natural resources 10%, venture capital 10%, and distressed debt 5%.

SRI and Corporate Governance

Forty-six study respondents, or 16.5%, reported they have socially responsible investing criteria. Most of these institutions (61%) screen part of their portfolios and 33% screen all of their portfolios. Among these institutions, the investment restrictions cited most often were those related to tobacco (74%); firearms/weapons (30%); alcohol (24%) and pornography (22%).

Nearly three-quarters of study respondents reported having conflict of interest policies for their board and investment committee. Eighty-seven percent reported having the same policy for senior staff. Twenty-eight percent of respondents allow board members to do business with the institution.

The highest risks identified for board members on a scale of 1 to 5 (with 5 the highest) were failure to preserve the value of the portfolio in real terms (4.6), followed by failure to achieve investment objectives (4.4). The most commonly cited processes for resolution of potential conflicts were disclosure (25%) and recusal (21%).

The Commonfund Benchmarks Study 2007 Foundations Report, sponsored by the Commonfund Institute, surveyed 279 independent/private and community foundations throughout the U.S. with total endowment assets of $192 billion.   The study was conducted through telephone interviews during the fourth quarter of 2006 and first quarter of 2007.   It included 214 independent/private and 65 community foundations.

Results were reported as of December 31, 2006, the fiscal year-end for most institutions surveyed. All returns are net of fees.