Foundations and charities reported returns of more than 20% in 2009, an increase of almost 50 percentage points from a year earlier, according to a survey by the Commonfund Institute.
The returns also were the highest in the eight-year history of the Wilton, Conn.-based Commonfund Institute's Benchmark Study of Foundations and in the six-year history of its separate Benchmark Study of Operating Charities.
Foundations returned an average 20.9% and operating charities returned 21.5% for the year ended Dec. 31, 2009. Both suffered losses of 26% in 2008. Three-year returns for foundations and charities were an annualized -1.1% and -0.7%, respectively, and five-year returns were 3.6% and 4%, respectively.
The previous average high return for foundations was 17.6% in 2003, following the rebound from the collapse of the tech bubble, John S. Griswold, Commonfund executive director, said in a telephone interview.
Mr. Griswold said that while the high returns were a relief to those organizations, they fall short of covering spending, inflation and other costs for many.
Mr. Griswold said donations to charities and community foundations are down for the year. Spending is up for foundations, he said.
A preliminary analysis of the reports shows that 38% of operating charities and 55% of community foundations reported receiving less in 2009 vs. 35% of charities and 61% of community foundations receiving less in 2008.
The average effective spending rate in 2009 for foundations was 5.9%, up 0.1 percentage points from 2008 and up 0.4 percentage points from 2007. Charities reported a spending rate of 4.9%, down 0.2 percentage points from 2008 and down 0.7 percentage points from 2007.
Cash-strapped state governments also have added to the financial stress, Mr. Griswold said.
“Government support at the state level, which is the principal source (of revenue) for small charities, was cut drastically and is being cut as we speak,” he said, although the study does not quantify government contributions to charities.
Mr. Griswold also said many private foundations are struggling because they typically do not receive additional donations after the non-profit is created.
Despite the uphill battle on contributions, returns for foundations were positive in almost all asset classes, with a few alternatives classes as the exception.
As of Dec. 31, 2009, international equities was the top performer for foundations, returning 39.1%; followed by domestic equities, at 30%; distressed debt, 25.9%; commodities and managed futures, 22.3%; marketable alternative strategies — including hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives — at 18.6%; energy and natural resources, 15.5%; fixed income, 13.1%; alternatives, 10.5%; and short-term securities and cash, 9.2%. The negative returns came in private equity, at -0.3%; venture capital, -3.6%; and private equity real estate, -13.5%.
The average asset allocation for foundations at year-end 2009, was 35% alternatives, 28% domestic equities, 16% international equities, 14% fixed income and 7% short-term securities, cash and other investments.
According to the report, foundations with higher allocations to fixed income and cash turned in higher returns in 2008 and 2009, but Mr. Griswold said the institute does not believe fixed income and cash can generate the returns needed by foundations in the long term to fulfill their missions.
“Over the long term, we believe in the teachings of modern portfolio theory; diversification works,” Mr. Griswold said in an interview, adding that investors in fixed income won't see much return in an environment of rising interest rates.
Returns were similar for operating charities, with international equities the top performer at 37.4%; domestic equities, 31.1%; energy and natural resources, 25.1%; commodities and managed futures, 23.3%; marketable alternative strategies — including hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives — at 18.5%; alternatives, 16.8%; distressed debt, 16.7%; fixed income, 13.1%; short-term securities and cash, 4.7%; and private equity, at 0.3%. The negative returns came in venture capital, at -2.7%, and private equity real estate, -16.2%.
The two studies covered 173 foundations and 66 charities, representing a combined $103.7 billion in assets.