WILTON, Conn. — U.S. independent/private and community foundations reported an average annual return of 13.7% in fiscal 2006, up from 7.9% the previous year, according to a study by Commonfund.
The Commonfund Benchmarks Study 2007 Foundations Report found that average returns ranged from 15.6% for the largest foundations, with $1 billion or more in assets, to 12.4% for the smallest foundations, those with assets of $51 million to $100 million.
“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 of Wilton-based Commonfund, in a news release.
The allocation to alternative investments jumped to 23% in 2006 from 21% in 2005, and international equities rose to 20% on average, compared with 18% the year before.
The average domestic equities allocation — nearly three-quarters of which is actively managed — declined to 33% from 36% and the average fixed-income allocation declined to 16% from 18% a year earlier. Cash/short-term investments were 8%, compared with 7% in fiscal 2005.
Following the trend of past years, foundation executives said they expect to continue increasing allocations to alternative strategies and international equity at the expense of domestic equity, fixed income and cash during fiscal 2007.
“This is a continuation of asset allocation trends we’ve seen for a number of years, with foundations reducing allocations to domestic equities and fixed income and increasing allocations to international equities and alternative strategies,” said William Jarvis, managing director for Commonfund, in an interview.
Within alternatives, the average foundation heavily favored hedge funds, with 46% of alternative assets devoted to the strategy, followed by private equity at 17%.
Foundations with $101 million to $500 million in assets reported the highest average hedge fund allocation, 62%, while the largest foundations had 41% committed to hedge funds, on average. Private equity real estate allocations were 12% of the average foundation’s alternatives allocation; energy and natural resources were 10%; venture capital was 10%; and distressed debt was 5%.
“The popular image of hedge fund investing is that institutions are trying to hit the ball out of the park in terms of returns, but our research shows that foundations look to hedge funds primarily for portfolio diversification and downside risk protection,” Mr. Jarvis said.
Roughly 16.5% of respondents had some social investing restrictions on their portfolios, the study also found. Of those, 74% had restrictions on tobacco-related investments, 30% on firearms or weapons investments, 24% on alcohol, and 22% on pornography.
Average three- and five-year returns for all institutions were 11.3% and 9% respectively. The annual study surveyed 279 foundations with a total of $192 billion in assets.
