CCSF. Council on Foundations - Commonfund. Study of Foundations STUDY OF INVESTMENT OF ENDOWMENTS FOR PRIVATE AND COMMUNITY FOUNDATIONS

Transcription

1 Council on Foundations - Commonfund CCSF Study of Foundations 2014 STUDY OF INVESTMENT OF ENDOWMENTS FOR PRIVATE AND COMMUNITY FOUNDATIONS INVESTMENT RETURNS PORTFOLIO MANAGEMENT ASSET ALLOCATION SPENDING RATE/POLICY DEBT FEES & EXPENSES LIQUIDITY INVESTMENT OFFICE CONSULTANTS INVESTMENT COMMITTEE/BOARD

2 2014 Council on Foundations- Commonfund Study of Investment of Endowments for Private and Community Foundations Annual report of the Council on Foundations and Commonfund Institute on investment and governance policies and practices of private and community foundations. Contents 2015 Council on Foundations and Commonfund Institute. All rights reserved. Council on Foundations - Commonfund CCSF

3 WELCOME August 2015 It is our pleasure to share with you the 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF), marking the third year of collaboration between the Council on Foundations and Commonfund Institute. As in past years, our goal is to provide you with an authoritative and comprehensive annual survey of foundation investment and governance practices for the benefit of trustees and staff, as well as for the larger community of grantees, policymakers and stakeholders. The CCSF builds on Commonfund Institute s previous foundation research, which covered the fiscal years from 2002 through With the advent of the CCSF in 2012, the Institute and the Council embarked on a new and rewarding research relationship covering private foundations. This year s Study introduces a further enhancement by bringing community foundations previously the subject of a separate series of Commonfund Institute reports into the CCSF, thereby providing a single, comprehensive source of information on both private and community foundations. It is important to note that we have included information and data for community foundation endowment funds only; the data do not reflect the activity of the many different types of non-endowed funds that community foundations hold. We wish to express our gratitude to the professionals and volunteers at participating foundations for their invaluable contributions of time and knowledge. Both the Council on Foundations and Commonfund Institute hope that this Study will serve as a valuable tool for foundation boards and senior staff as they make decisions shaping the future of their institutions. As always, we welcome your comments and look forward to being of service to you in the future. Vikki Spruill President and Chief Executive Officer Council on Foundations John S. Griswold Executive Director Commonfund Institute 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations i

4 TABLE OF CONTENTS Chapter 1 The Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 1 CCSF Leaders 2 Chapter 2 Returns and Investment Objectives 5 Global Investment Environment 5 Private and Community Foundation Returns 8 Longer-Term Returns 9 Returns by Asset Class 12 Long-Term Return Objectives 14 Chapter 3 Asset Allocation, Investment Policies, Restrictions, and Responsible Investing Criteria 16 Overall Asset Allocation 16 Investments by Asset Class 19 Portfolio Rebalancing 21 Responsible Investing Practices: SRI, ESG and Impact Investing 27 Viewpoint Taking a Longer View 32 Chapter 4 Debt 38 Chapter 5 Fund Flows 40 Spending 40 Costs 45 Underwater Funds 46 Gifts to Community Foundations 47 Chapter 6 Resources, Management and Governance 48 Professional Staffing 48 Consultant Use 50 Manager Use 52 Governance 56 Investment Committee Demographics 57 Appendices I V 59 I: About Commonfund Institute and The Council on Foundations 59 II: Supplemental Tables 61 III: Demographic Tables 65 IV: Participating Foundations 66 V: Glossary of Terms 70

5 LIST OF FIGURES 1.1 CCSF Institutions by Size 1.2 CCSF Institutions by Type 1.3 Top Decile and Top Quartile Performers 1.4 Average Net Returns for Top Decile and Top Quartile Performers 1.5 Asset Allocations for Total, Top Decile and Top Quartile Performers One-, Three-, Five- and 10-Year Returns for Periods Ending December 31, Average Annual Total Net Returns for Total Institutions for Fiscal Years Average One-, Three-, Five- and 10-Year Net Returns One-Year and 10-Year Volatility for Fiscal Years for Private Foundations One-Year and 10-Year Volatility for Fiscal Years for Community Foundations Sharpe Ratios for Fiscal Years for Private Foundations Sharpe Ratios for Fiscal Years for Community Foundations 2.5 Average Return by Asset Class for Fiscal Year Detailed Average Return by Asset Class for Fiscal Year Investable Assets That Are Not Part of Endowment 2.8 Long-Term Return Objectives 3.1 Asset Allocations for Total Institutions for Fiscal Years Asset Allocations for Fiscal Year Detailed Asset Allocations for Fiscal Year Domestic Equity Asset Mix for Fiscal Year Fixed Income Asset Mix for Fiscal Year International Equity Asset Mix for Fiscal Year Alternative Strategies Asset Mix for Fiscal Year Portfolio Rebalancing for Fiscal Year Portfolio Rebalancing Frequency for Fiscal Year Percent Allocated to Liquidity Categories in Fiscal Year Classifications Used in Constructing Portfolio 3.12 Employs Risk Limits and Guidelines Within Portfolio 3.13 Types of Metrics Used 3.14 Applies Stress or Scenario Tests to Portfolio 3.15 Currently Required/Permitted Responsible Investing Practices 3.16 Board Has Decided to Exclude Responsible Investing Considerations 3.17 Considering Changing Investment Policy to Include ESG Integration 3.18 Managers Integrate Responsible Investing in Decision-Making 3.19 Managers Vote Proxies Consistent with Responsible Investing Criteria 3.20 Proxy Voting Was Essential in Hiring Manager 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations iii

6 LIST OF FIGURES (CONTINUED) 4.1 Debt Levels for Fiscal Year Changes to Debt in Fiscal Year Plan to Significantly Increase Debt in Next Two Years 4.4 Maintain Line of Credit with Financial Institution 5.1 Average Annual Effective Spending Rates for Total Institutions for Fiscal Years Average Annual Effective Spending Rates for Fiscal Year Changes to Effective Spending Rates for Fiscal Year Spending Policy for Fiscal Year Changes to Spending Dollars for Fiscal Year Percentage of Operating Budget Funded by Endowment 5.7 Cost of Managing Investment Programs for Fiscal Year Included in Cost Calculations 5.9 Percentage of Endowment Under Water for Fiscal Year Changes in Gifts and Donations for Community Foundations for Fiscal Year Professional Staffing of Investment Function for Fiscal Year Organization Has a Chief Investment Officer 6.3 Responsible for Investment Oversight 6.4 Consultant Use 6.5 Outsourcing of Investment Function for Fiscal Year Number of Managers Used by Asset Class in Fiscal Year Responsibility for Manager Due Diligence Before and After Hiring at Private Foundations Responsibility for Manager Due Diligence Before and After Hiring at Community Foundations 6.8 Ongoing Due Diligence Procedures Employed 6.9 Conflict of Interest Policies 6.10 Voting Members on Investment Committee in Fiscal Year Investment Committee Credentials for Fiscal Year Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations iv

7 Executive Summary 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations The 244 private and community foundations par ticipating in the 2014 Council on Foundations- Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF) represent $107.4 billion in assets. One hundred forty-two private foundations and 102 community foundations make up the Study, which covers the 2014 fiscal year (January 1 December 31, 2014). The private foundations participating in the Study reported an average return of 6.1 percent for FY2014, down from the 15.6 percent return reported for FY2013. Participating community foun dations reported an average return of 4.8 percent for FY2014 compared to the previous year s average return of 15.2 percent. (All returns are reported net of fees.) Returns for private foundations were higher than for community foundations in FY2014 for a variety of reasons. The highest overall return, 7.1 percent, was reported by private foundations with assets over $500 million. Private foundations in the other two size categories those with assets between $101 and $500 million and those with assets under $101 million reported average returns of 5.9 percent. Community foundations with assets over $500 million returned 4.9 percent on average versus 4.2 percent for those with assets between $101 and $500 million and 5.0 percent for those with assets under $101 million. The difference in returns could be explained by a number of factors, including variations in asset allocation, spending and investment policies, and assets available for investment. Viewing investment returns over multiple-year periods, participating private foundations returned an average of 11.1 percent for the trailing three-year period versus 10.5 percent for community foundations. For the trailing five-year period, private foun dations returned an average of 9.2 percent compared to 8.7 percent for community foundations. An exception occurred in the trailing 10-year period, during which participating foundations of both types reported an average annual return of 6.3 percent. As was the case last year, domestic equities generated the highest return in FY2014, at 10.4 percent for private foundations and 9.8 percent for community foundations. Alternative strategies followed, 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations v

8 returning 4.4 percent for private foundations and 3.7 percent for community foundations. Fixed income returns averaged 3.8 percent for private foundations and 3.2 percent for community foundations. Short-term securities/cash/other followed with a return of 0.2 percent for both private and community foundations. International equity returns were negative for the fiscal year. Private foundations realized a return of -0.9 percent from the asset class, while community foundations international equity returns averaged -2.7 percent. Within the broad category of alternative strategies, venture capital produced the highest return for private foundations, at 22.0 percent. 1 Distressed debt, which produced the highest return among alternative strategies for the past two years, was still strong, generating a 19.3 percent return for private foundations. 1 Private equity real estate (non-campus) produced the highest alternative strategy return among community foundations, at 12.4 percent, while it returned 11.7 percent for private foundations. Private equity (LBOs, mezzanine, M&A funds and international private equity) returned 13.8 percent for private foundations and 10.4 percent for community foundations. Respectively for these two types of foundations, energy and natural resources returned 7.0 percent and -0.1 percent. Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives) gained 4.0 percent for private foundations and 2.7 percent for community foundations. Commodities and managed futures produced a negative return of percent for foundations of both categories. Additional information about foundation investment performance, asset allocation, governance and related topics follows. Asset Allocation At December 31, 2014, participating institutions asset allocations and comparable FY2013 allocations were: Private Community numbers in percent Domestic equities Fixed income International equities Alternative strategies Short-term securities/ cash/other Spending Foundations, both private and public, are subject to specific state laws governing investment and spending of endowed funds. All states (with the exception of Pennsylvania) have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which sets forth requirements that foundations must observe when investing and spending, among other matters. Community foundations, in particular, establish prudent spending policies informed by the requirements of UPMIFA. The effective spending rate derived by dividing the amount spent on mission by the market value of the foundation s asset pool at the beginning of the year declined modestly to 5.4 percent in FY2014 from 5.5 percent in FY2013 among private foundations. The effective spending rate among community foundations was unchanged at 4.8 percent. 1 The number of responses for this investment strategy among community foundations was too small to analyze Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations vi

9 When the data are viewed by foundation size, private foundations with assets over $500 million reported an effective spending rate of 5.1 percent while community foundations of the same size reported an effective spending rate from their endowed assets of 5.2 percent. Private foundations with assets between $101 million and $500 million reported an effective spending rate of 5.2 percent, while community foundations in that size category reported a rate of 5.3 percent. The highest effective spending rate, 5.8 percent, was reported by private foundations with assets under $101 million. Community foundations in the same category reported the lowest effective spending rate, 4.4 percent. Fifty-nine percent of private foundations and 61 percent of community foundations reported increasing their mission-related spending in dollars in FY2014. Among private foundations, the average rate of increase was 21.1 percent, while among community foundations the average increase was 33.9 percent. Debt For FY2014, just 19 institutions in total 12 private foundations and seven community foundations reported having debt. The average amount among those with debt was $19.3 million for private foundations and $15.4 million for community foundations. Median debt was $9.1 million for private foundations and $2.2 million for community foundations. Resources, Management and Governance The number of full-time professional private foundation staff devoted to investments averaged 1.3 full-time equivalents (FTEs), while community foundations reported an average of 0.6 FTE devoted to investments. Twenty-three percent of private foundations and 10 percent of community foundations reported having a chief investment officer. Seventy-three percent of private foundations and 90 percent of community foundations said that investment oversight duties at their institution were primarily the responsibility of their investment committee. Twenty-nine percent of the former and 23 percent of the latter said that responsibility belonged to executive leadership/staff, while 25 percent of each type of foundation said their board was responsible. Consultant use was fairly uniform, with 75 percent of private foundations and 72 percent of community foundations reporting using a consultant. Ninetythree percent of community foundations reported using consultants for performance attribution and measurement, the high for these foundations, while 79 percent of private foundations used con sultants for this purpose as well as for asset allocation/rebalancing. Similarly, reported outsourcing of the investment function was about the same among the two types of foundation. Thirty-six percent of private foundations and 35 percent of community foundations said they have substantially outsourced the function. All of the community foundations and 92 percent of private foundations reported having a conflict of interest policy; 85 percent of the former and 60 percent of the latter apply the policy to their board and investment committee. Ninety-six percent of community foundations and 88 percent of private foundations apply the policy to senior staff members Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations vii

10 HOW TO READ THIS REPORT This Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations for fiscal year 2014 is the product of a col laboration between the Council on Foundations and Commonfund Institute. Our purpose is to provide a timely and reliable reference resource for those responsible for investment, financial and governance decisions at private and community foundations throughout the country. This section of the report explains the structure of the Study and provides answers to commonly asked questions, with the aim of helping readers and their organizations to obtain the greatest benefit from the Study. BACKGROUND From FY2002 to FY2011, Commonfund Institute published the Commonfund Benchmarks Study Foundations Report, an annual survey of independent and community foundations. 2 This Study began publication in FY2012 as the Council on Foundations-Commonfund Study of Investments for Private Foundations (CCSF). During this period, community foundations continued to be covered in a separate Commonfund Benchmarks report. With this, the 2014 CCSF, we are instituting a further enhancement that reflects our two organizations joint vision of sharing information across foundation types by offering a single, comprehensive Study of private and community foundations. We acknowledge, however, that the many differences in policies and regulations at community and private foundations prevent strict one-on-one comparisons. The CCSF s format is built on data gathered from the 244 participating foundations. The data are presented in the tables and charts appearing throughout the report, and an accompanying narrative interprets and analyzes the data presented in the tables. ACCESS AND NAVIGATION The CCSF is delivered as an Adobe Acrobat file in pdf format. Readers who want to take full advantage of the pdf should download and install the free program Adobe Acrobat Reader (available from on their computers. All items in the document s Table of Contents can be reached by clicking on the chapter, subhead or page. This is also true of the figures listed on pages iii and iv. In addition, by opening the Bookmarks tab in Acrobat Reader, an internal table of contents is revealed, permitting you to easily navigate back and forth and jump from one section directly to another. 2 The early Foundations Reports included operating charities; beginning in 2007, the Institute began publishing a separate survey of these organizations as the Commonfund Benchmarks Study Operating Charities Report Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations viii

11 TABLES The tables in the main body of the report generally display data in two primary ways for both types of institution private foundations and community foundations. The first is the total number of institutions responding to a particular question. The second breaks this total number of respondents into three cohorts, segmented according to the size of their foundation assets. The three size cohorts are institutions with total endowed assets: Over $500 million Between $101 million and $500 million Under $101 million Each size cohort is assigned its own color, which remains consistent throughout the report. The purpose of this color coding is to assist readers in locating the size category relevant to their own institutions and finding the appropriate benchmark data. Supplemental data is provided in Appendix II, where additional figures provide readers with another data set for further analysis. For example, while asset allocation data in the main body of the report is presented on a dollar-weighted basis, Appendix II also presents asset allocation data calculated on an equal-weighted basis. Other tables in the text provide comparative data from other types of nonprofit institution. CCSF LEADERS Chapter 1 offers four tables (1.3 through 1.5 and 1.5A/EW) that present investment return data for foundations whose one-year FY2014 return ranks them in the top decile and top quartile of all Study participants. The top decile refers to the 10 percent of Study participants with the highest one-year return for FY2014; the top quartile are those institutions whose one-year FY2014 return places them in the top 25 percent of all Study respondents. RESEARCH PROCESS AND METHODOLOGY The design of the 2014 CCSF took place in the winter of Web-enabled questionnaires and field interviews followed in the first and second quarters of calendar The 244 participating institutions were interviewed using two techniques: telephone interviews and an online survey instrument. The respondents were the individuals most knowledgeable about investment matters at participating 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations ix

12 institutions, and their answers to our questions provided both the quantitative data and qualitative commentary that form the basis of this report. An asset allocation worksheet also was completed by all Study participants. The distribution of the 244 institutions across size and type was designed to produce data that are statistically representative throughout the full sample. This aspect of the research design is crucial in that it underlies the ability to benchmark a particular institution against true peers. Of significance for the stability of the data, 64 percent of the private and community foundations participating in this year s CCSF also participated in last year s Studies. CCSF is still a relatively new Study, and has now been modified to combine private and community foundations in one Report. We therefore continue to exercise care in making year-over-year comparisons. In certain instances where longer-term information patterns provide insight, the data are trended back to earlier Commonfund Benchmarks Studies. Given the turbulent market and economic environment that has prevailed since , apparent changes in the demographics of Study participants can be misleading. Changes from year to year can reflect fluctuations in portfolio values and lead to the reclassification of institutions into larger or smaller size categories. The research team has prepared a matched sample of data from this Study and last year s to identify those areas where findings may reflect significant migrations across size categories and/or new participants coming into the Study universe and, where relevant, these have been noted. Any trend information presented in this report, however, should be interpreted only directionally as an indication of change. GLOSSARY A glossary of frequently used terms may be found in Appendix V. FREQUENTLY ASKED QUESTIONS How does this Study calculate three-, five- and 10-year investment returns for participating institutions? We don t. Each year we ask our Study participants to provide their own three-, five- and 10-year returns, and we report average responses. In short, these returns are reported, not derived Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations x

13 Of the 244 institutions participating in the Study, why are there 15 institutions in the top decile for private foundations and 11 for community foundations when it seems it should be 14 and 10, respectively? Some institutions were tied, as they reported the same return. This required expanding the top decile by one institution for both types of foundations. What is dollar-weighted? Dollar-weighted means that individual responses are weighted according to size or asset base when calculating average results meaning that responses from large participants have a greater impact on average results than those of smaller participants. By contrast, when overall results are calculated on an equal-weighted basis, each response has an equal impact on the average, regardless of the size of the respondent. Unless otherwise noted, asset allocation figures in this Study are dollar-weighted. Selected tables showing equal-weighted data may be found in Appendix II. Why do the bases (or number of respondents) change between Figures? Charts and tables contain one of two labels: Total Institutions or Responding Institutions. The Total Institutions label indicates that the figure depicts responses from the full set of 244 Study participants. Responding Institutions indicates that the responses come from a sub-set of participants. For example, Chapter 3 s Figure 3.7, which depicts participating foundations allocations to various alternative investment strategies, carries the Responding Institutions label because only 193 of the 244 Study participants reported using alternative strategies. Are all the data reported as averages? Most, but not all. The majority of the figures and most of the related commentary present data as the average value (the arithmetic mean, calculated by adding all the observations and dividing by the number of observations). However, some commentary and a few figures present median data. As differentiated from the mean or average, the median is the middle value, or data point in the middle. That is, half of the data points are above the median and half below. The median can be useful in presenting data that have extremely high or low points that can skew the average and make it a misleading indicator Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations xi

14 For community foundations, what assets are included as endowed assets? For purposes of this Study, endowed assets comprise the long-term investable asset pool. All funds, whatever their source, that are invested and spent in the same manner as the foundation s long-term investable asset pool are included in the definition of endowed assets. How are historical trends for community foundations determined if this is the first year they are included in this report? As noted above, historical trends for community foundations are derived from the Commonfund Benchmarks data series. More than two-thirds of community foundations with assets over $101 million in this year s CCSF participated in last year s Commonfund Benchmarks Study; due to a gratifying increase in participation by community foundations with assets under $101 million, the percentage of repeat participants in this size cohort is lower, at just over one-fifth. We have conducted matched sample evaluations of all data in order to ensure that year-to-year trends are accurately presented. How is community foundations defined in the body of the study? All of the data included in the community foundation results are from foundations that are public charities. The majority of these foundations (87 of 102 foundations, representing 87 percent of the assets held by foundations in this category) classify themselves as community foundations and/or meet the Council on Foundations definition of Community Foundations (see community foundations in the glossary on page 73). Data from the small number of other public foundations that participated in the survey were included in the community foundation category because they are also defined as public charities and they share many of the same operating characteristics as community foundations Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations xii

15 ACKNOWLEDGMENTS Commonfund Institute wishes to thank the following for their significant contributions to this Council on Foundations- Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF). England Associates, Inc. Our research partner since the inception of the Commonfund Benchmarks Studies initiative in 2000, England Associates, Inc., has provided leadership and project management throughout the Studies design, development, fielding and analysis. An independent proprietary research firm serving the needs of financial services clients for custom strategic and market research, England Associates and its entire team have our thanks for their continued vision and efforts in creating this valuable tool for our participating institutions. Riverside Associates, Inc., The Markets Group Riverside Associates, Inc. joined the team in 2003, fielding the Commonfund Benchmarks Study of Educational Endowments (now the NACUBO-Commonfund Study of Endowments, or NCSE). Riverside Associates is an invaluable partner in the research design and the interviewing of the participating institutions, and we wish to thank them for the professionalism and expertise they brought to this year s research. We are also indebted to the 244 participating institutions, many of them providing data for most or all previous Studies. The interviews that we conducted with them provide the foundation of the 2014 CCSF Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations xiii

16 Chapter 1 The Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations Two hundred forty-four foundations, representing $107.4 billion in assets, participated in this year s Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations (CCSF). In this report, participating foundations are segmented both by type and into three cohorts based on asset size to facilitate analysis and comparison. The size categories and the number of foundations in each are shown in Figure 1.1, while the composition of participating foundations by type private, family and community is shown in Figure 1.2. Figure 1.1 CCSF Institutions by Size number of institutions Total Institutions Private Community Large Total assets over $500 million Mid-size Total assets between $101 $500 million Small Total assets under $101 million Figure 1.2 CCSF Institutions by Types number of institutions Private foundations (independent) 97 Private foundations (family) 45 Community foundations 102 Total Institutions 244 s all family foundations participating in this study qualify as private foundations and hereafter are not separated out as a category but are included with all other participating private foundations 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 1

17 Figure 1.3 Top Decile and Top Quartile Performers numbers in percent (%) Total Institutions Top Decile Top Quartile Private Community Private Community Private Community Over $500 million $101 $500 million Under $101 million Sixty-four percent of foundations participating in last year s inaugural CCSF participated once again in this year s Study. This is within the range of historical norms; there was a 63 percent repeat participation rate last year and a 70 percent rate the year before that. In preparing this report, we have examined a matched sample of FY2013 and FY2014 data and highlight instances where the composition of respondents to a particular question is sufficiently different to warrant caution in drawing conclusions regarding trends. Where data for fiscal years prior to FY2012 are cited, they are derived from the predecessor Commonfund Benchmarks Study Foundations Reports and have been recal culated to include the relevant foundation type in order to present an accurate comparison. These numbers may therefore differ from those published in previous Commonfund Benchmarks Studies. It is important to note that, for purposes of this Report, we have included information and data for community foundation endowment funds only; the results herein do not, therefore, reflect the activity of the many different types of funds that community foundations hold that are nonendowed, such as non-endowed designated, field-ofinterest, agency, scholarship and donor advised funds, temporary project funds and pass-through funds. Foundations, both private and public, are subject to specific state laws governing investment and spending of endowed funds. All states (with the exception of Pennsylvania) have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which sets forth requirements that foundations must observe when investing and spending, among other matters. Community foundations, in particular, establish prudent spending policies informed by the requirements of UPMIFA. CCSF LEADERS Each year, we offer an analysis of those participants whose fiscal year returns placed them in the top decile (top 10 percent) and top quartile (top 25 percent) of all Study participants. We designate these institutions as the CCSF Leaders. For this year s Study, 26 foundations made up the top decile of performers while 62 foundations constituted the top quartile. Among private foundations, institutions with assets over $500 million were over-represented among CCSF Leaders, accounting for 18 percent of private foundations but 27 percent of the top decile and 28 percent of the top quartile. Private foundations with assets between $101 and $500 million and those with assets under $101 million were both underrepresented among CCSF Leaders the former more so than the latter. A different pattern emerged among community foundations, where those with assets under $101 million were overrepresented, comprising 57 percent of the total community foundation group but 82 percent of the top decile and 62 percent of the top quartile. The largest community foundations were equally represented among the top 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 2

18 Figure 1.4 Average Net Returnss for Total, Top Decile and Top Quartile Performers numbers in percent (%) Total Institutions Top Decile Top Quartile Private Community Private Community Private Community FY2014 net annual total return year net return year net return year net return s net of fees quartile 11 percent of community foundations overall and 11 percent of the top quartile but had no representation at all among the top decile. Community foundations with assets between $101 and $500 million were underrepresented in both the top decile and top quartile. Without drawing broad conclusions on the basis of one year s performance, the higher presence of large institutions in the top decile and top quartile appears to confirm our observation from last year in both the CCSF and the Commonfund Benchmarks Community Foundations Report of a reassertion of the advantages of the more diversified investment portfolios that these institutions generally employ. The outperformance of institutions with larger asset pools over long time periods is due, among other things, to their ability to support more diversified investment programs; to recruit and compensate higher numbers of professional staff to oversee those more complex portfolios; to attract more experienced investment committees; and, through network effects, to gain access to top-tier investment managers, particularly in alternative strategies. In the recent global financial crisis and ensuing recession we saw a reversal of that pattern. For example, in the Commonfund Benchmarks Study Foundations Report for FY2008, smaller foundations outperformed owing to their higher allocations to fixed income and short-term securities/cash/other. For FY2009 and FY2010, smaller and mid-sized foundations, with their higher allocations to public equities, benefited from the strong rebound in domestic and international equity markets after the sharp contraction of FY2007 and FY2008. In subsequent years, the diversified investment model continued to be challenged by the strong performance of liquid equity markets, supported by central bank policy action, which led less-diversified portfolios to perform better than those with a higher degree of diversification. For FY2014 we observe a more nuanced picture, in which strong liquid market returns were still present but lessliquid strategies also performed well in many cases. In concrete terms, the same general bifurcated pattern prevailed this year as last, with the largest and smallest private foundations being either overrepresented or proportionally represented among the Leaders. Among community foundations, smaller institutions continued to be overrepresented but none of the largest group with assets over $500 million made the top decile. In both cases, mid-sized foundations were underrepresented. In the case of private foundations with assets over $500 million, their overrepresentation can be traced to the fact that they had the largest allocation to alternative strategies and the smallest to international equities. Community foundations benefited primarily from having large allocations to domestic equities. (Please see Figure 3.2 on page 17.) Looking at longer-term return data, the difference between the Study population as a whole and top decile and top quartile performers tends to narrow over time. For instance, while the top decile of private foundations outperformed all foundations of this type by 600 basis points in FY2014, the performance edge narrowed to 210, 160 and 50 basis points, respectively, for the trailing three-, fiveand 10-year periods Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 3

19 The one-year performance gap is not as pronounced among community foundations, where the difference is 380 basis points for the top decile over all participating community foundations. For longer periods, however, the edge in return is similar to that of private foundations. For the trailing three-year period, the difference is 220 basis points; for the trailing five years, 170 basis points; and for the trailing 10 years, 70 basis points. In both cases, these patterns are typical and serve as cautionary examples to demonstrate that strategies which are conspicuously successful in one market environment may yield only mediocre results in other situations. Turning to asset allocation, clear differences emerge by type among the overall population of Study participants and the top decile/top quartile. These differences illustrate the multiple routes by which foundations might have reached the top decile or top quartile in FY2014. For example, while the top decile and top quartile of private foundations have smaller domestic equity allocations than the overall group of that type, among community foundations the top decile has a larger domestic equity allocation than both the broad community foundation group and the top quartile. Among private foundations, the top decile and top quartile have larger allocations to alternative strategies than this population overall, while among community foundations the pattern is mixed: the top decile has a lower allocation, while the top quartile has a higher allocation. Among private foundations, the top decile and top quartile have lower fixed income allocations, but, once again, the pattern is more mixed among community foundations. The Leaders among both types of foundation benefitted from lower allocations to poor-performing international equities. And, while allocations to short-term securities/cash/other were equal at 4 percent among all Study participants, the top decile and top quartile of private foundations reported larger cash and near-cash allocations than did community foundations. Figure 1.5 Asset Allocationss for Total, Top Decile and Top Quartile Performers numbers in percent (%) Total Institutions Top Decile Top Quartile Private Community Private Community Private Community Domestic equities Fixed income International equities Alternative strategies Short-term securities/cash/other s dollar-weighted 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 4

20 Chapter 2 Returns and Investment Objectives GLOBAL INVESTMENT ENVIRONMENT Investors had every reason to be cautious in early After a long, harsh winter, reported U.S. GDP contracted 2.1 percent in the first quarter of the year. Europe s economy was stagnant. Potential defaults in Greece and geopolitical tensions in Ukraine and the Middle East kept investors on edge. The S&P 500 Index had closed out 2013 with an annual gain of 32.4 percent; a retrenchment would be natural in the normal course of market cycles. The same was true for international developed markets, as the MSCI World ex-u.s. Index had gained 21.0 percent in The star performer was Japan, where aggressive monetary and fiscal policy stimulus following the election of Shinzo Abe propelled the Nikkei to a 56 percent gain (in local currency terms). As for fixed income, the outlook was uncertain. Janet Yellen had replaced Ben Bernanke as chair of the Federal Reserve in February; could the longawaited reversal in monetary policy and higher short-term interest rates be at hand? As the year evolved, those fears proved to be unfounded. In the U.S., GDP rose at annual rates of 4.6 percent and 5.0 percent, respectively, in the second and third quarters (although the growth rate eased to 2.2 percent in the fourth quarter). Except for January, every month in 2014 was marked by the creation of more than 200,000 nonfarm jobs. By May, all 8.7 million jobs lost during the recession had been recouped. The industrial renaissance in the U.S. continued as an investment theme, with auto, capital equipment and energy output all showing strength. The newest chapter in the industrial revival was written by corporations bringing manufacturing back to the U.S., and by foreign corporations joining the trend. The rationale was that the U.S., already a leader in technology, could now offer abundant, lower-cost energy and, further, that manufacturing in the U.S. would put corporations closer to their largest market and reduce transportation costs. Corporate earnings also exceeded expectations. In 2014 most corporations beat analysts top-line revenue estimates by a small amount, but they reported bottom-line profits that were substantially in excess of forecasts as a result of strong cost controls. The favorable business climate was aided by the Federal Reserve, which kept short-term interest rates at record lows even as it wound down its program of quantitative easing during the year, ending it altogether in October. On the energy front, oil prices swung from 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 5

21 June, when the price of West Texas Intermediate crude topped out at $106 per barrel, to December when crude oil prices dropped to average just $59 per barrel. The steep decline provoked opposite interpretations, ranging from those analysts who felt that it was good for consumers to those who said it could be a harbinger of slowing economic growth. Large-capitalization U.S. stocks were the chief beneficiaries of this environment, with the S&P 500 returning 13.7 percent in Low volatility, dividend-paying stocks for example, utilities were especially strong during the year. Perhaps the biggest surprise came from bonds, where investors expected intermediate- and longterm issues to suffer price declines owing to real or anticipated rises in interest rates. In fact, after a negative return in 2013, the Barclays Aggregate Index returned 6.0 percent in The surprise behind the decline in Treasury yields in 2014 was the strong European bond market, where due to challenged economic conditions bonds staged a rally of their own. The U.S. equity market lost some of its momentum in the second half, where a sell-off in October mostly due to conditions outside the U.S. the accelerating decline in crude oil prices and a softer-thanexpected holiday selling season combined to restrain returns as the year wound down. International equity markets did not fare as well. Europe, with very low to no GDP growth, served as a drag on developed country equity markets, leading the MSCI World ex-u.s. Net Index to return -4.3 percent. Greece in particular was the focal point for investor concerns. Previous international bailouts having failed to stabilize the country s financial situation, Greece appeared to be leaning toward a test of potential default or withdrawal from the euro currency both viewed as highly negative events with unpredictable consequences. Hostilities in Ukraine, including the Russian Federation s annexation of Crimea in March and the return of a Cold War-like mood in Eastern Europe, also kept markets on edge. For countries like Germany that export goods to Russia, economic sanctions imposed on Russia in the aftermath of the Crimean annexation had a material effect on GDP. Despite the difficulties, the MSCI Europe Index rose in local currency terms in But for U.S. investors, the strong U.S. dollar, which gained about 12 percent against the euro in 2014, caused the index to decline more than 6 percent, with the second half of the year being particularly weak. In Japan, a similar pattern was observed, with a 9 percent-plus return for the MSCI Japan Index in local market terms becoming a 4 percent decline when converted to U.S. dollars. Japan nevertheless continued to be a country where monetary and fiscal policies were coordinated and corporate profits were improving. Economic growth in Japan slowed after the imposition of a consumption tax increase in April, but the economy recovered and the country s growth has been validated into Emerging markets were challenged in Structurally, China s growth slowed markedly, to a pace significantly lower than its officially announced GDP numbers. Brazil and Russia were weak in the wake of the decline in commodity prices and, in the case of Russia, the imposition of international sanctions. In India, however, Narendra Modi s election as Prime Minister in May boosted confidence in the economy and the Reserve Bank of India moved successfully to combat inflation. The result was a 29.9 percent gain for the S&P BSE SENSEX for the year Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 6

22 Most alternative strategies posted a good year in Venture capital, private equity, private equity real estate and distressed debt all provided strong returns. Hedge fund strategies had a more challenging year. To take one example, trend-following approaches worked well until the market changed direction something that was abrupt and severe when it did occur (in the previously mentioned October sell-off, the S&P 500 suffered a 3.1 percent decline during the first full week of the month). Trend followers made money in being short commodities, which, as noted, encountered a difficult year. Distressed debt was helped by a narrowing of credit spreads. Venture capital and private equity were strong, due in large part to the hospitable market environment created by the robust performance of the domestic equity market in Real estate benefited from improved employment, ongoing low interest rates and housing demand trends, particularly as millennials began to enter their home-buying years. Overseas buyers continued to favor the domestic real estate market as a way to shift assets into the relative safety and desirability of properties in the U.S. One-, Three-, Five- and 10-Year Returns for Periods Ending December 31, 2014 numbers in percent (%) Index 1-Year 3-Year 5-Year 10-Year S&P Barclays Aggregate Bond Wilshire Real Estate Securities MSCI World ex-u.s MSCI Emerging Markets Free Net MSCI Europes Month Treasury Bill (Average Yield) NCREIF Thomson Reuters Private Equityss HFRI Distressed Debt HFRI Fund of Funds Composite DJ Commodities s local currency ss Benchmark reflects all U.S. private capital funds including but not limited to U.S. venture capital, buyout and mezzanine funds through 6/30/14. It does not include a dedicated natural resources component but does include (as buyouts) certain natural resources funds. Sources: Bloomberg, FactSet, HFR, MSCI 2014 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 7

23 PRIVATE AND COMMUNITY FOUNDATION RETURNS The global investment environment in FY2014 had a broad negative effect on average returns at private and community foundations. For 2014, private foundations participating in the CCSF reported an average return of 6.1 percent, down from the 15.6 percent return reported for FY2013. Participating community foundations reported an average return of 4.8 percent for FY2014 compared to the previous year s average return of 15.2 percent. (All returns are net of fees.) When the data are viewed by size and type of foundation, private foundations realized higher returns across all size categories than did community foundations. The greatest disparity occurred among foundations with assets over $500 million, where private foundations outperformed community foundations by 220 basis points. Among foundations with assets between $101 and $500 million, the spread for private foundations over community foundations was 170 basis points. The gap narrowed to 90 basis points among foundations with assets under $101 million. Figure 2.1 Average Annual Total Net Returns for Total Institutions for Fiscal Years s numbers in percent (%) 30% Total Institutions Private Foundations Community Foundations s Previously published FY numbers were recalculated to include only independent and family foundations Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations 8