Study: Operating Charity Investment Returns Rise to an Average of 15.1 Percent in Fiscal Year 2013

(Press release, Nov. 10, 2014) — Fiscal year 2013 investment returns for the 60 organizations participating in the FY2013 Commonfund Benchmarks Study^® of Operating Charities rose to an average of 15.1 percent in fiscal 2013 compared with an average return of 11.7 percent for FY2012.
The data, compiled and published by Commonfund Institute, reflect the investment management and governance practices and policies of 23 cultural organizations, 19 religious institutions and 18 social service organizations. The 60 organizations participating in the Study represent $24.3 billion in assets. Return data-reported net of fees throughout the Report-and all other Study data are for fiscal 2013 (January 1, 2013 to December 31, 2013).

Three-year net returns for participating operating charities averaged 8.5 percent (up from 7.6 percent a year ago); trailing five-year returns averaged 11.6 percent (well ahead of 2.2 percent a year ago, as the poor -25.8 percent return of FY2008 dropped out of the five-year calculation); and 10-year returns averaged 7.1 percent (7.6 percent last year).

Participating charities' highest return, at 31.1 percent, was produced by domestic equities, followed by international equities at 17.3 percent. Alternative strategies returned 10.5 percent, while short-term securities/cash/other returned 0.0 percent. Fixed income was the only major asset class to produce a negative return, at -0.7 percent.

This year's return profile was quite different from last year's. Like this year, traditional equities led the way in FY2012, with nearly equal returns of 16.9 percent for international equities and 16.7 percent for domestic equities. Fixed income, however, made a positive contribution, with a 7.4 percent gain. At a 7.1 percent return last year, alternative strategies improved 340 basis points this year, while short-term securities/cash/other gained 1.1 percent last year versus no change this year.

"What is most notable about returns in FY2013," said John S. Griswold, Executive Director of Commonfund Institute, "is that both more diversified and less diversified portfolios produced good returns and risk was generally muted. We attribute much of this to the record low interest rate investment environment created by the Federal Reserve, although we will now have to wait and see how the withdrawal of monetary support affects investment portfolios."

Griswold pointed out that larger operating charities, which are generally the most diversified, have historically produced higher returns. In FY2013, however, smaller operating charities (those with assets under $101 million) generated an average return of 16.5 percent compared with 13.4 percent for the largest charities participating in the Study (those with assets over $500 million). Returns for operating charities with assets between $101 and $500 million fell in the middle, at an average of 15.1 percent. "Strong returns from domestic equities sparked good returns for participating charities of all sizes," Griswold noted, adding, "The largest operating charities actually secured the highest return from their domestic equities allocation but because the smaller charities had the largest allocation to this asset class they secured the highest overall portfolio performance in 2013."

The Study for FY2013 represented the 10^th consecutive year that Commonfund Institute has reported on operating charities' investment results and related policies and practices. Beginning in 2003, operating charity data were combined with those of community and public foundations. In 2007, separate Studies were published for operating charities and foundations, a practice that continues today. Two years ago, Commonfund began a partnership with the Council on Foundations to produce the annual Council on Foundations-Commonfund Study of Investments for Private Foundations^TM (CCSF).

Forty-five percent of participating operating charities reported higher spending in dollars compared with 48 percent in FY2012 (up from 30 percent in FY2011). Con­versely, this year just 18 percent of charities decreased spending in dollars versus 25 percent doing so a year ago (and a marked decline from 35 percent in FY2011). Twenty-seven percent reported no change year over year, up from last year's 17 percent.

Thirty-seven percent of participating operating charities reported receiving increased donations this year, up from 32 percent in last year's Study (26 percent in FY2011). The median increase this year was 30.0percent versus 50.0 percent in the FY2012 Study. Twenty percent reported a decrease in gifts compared with 30 percent a year ago (12 percent in FY2011), with the median decrease being 17.4 percent. Thirty-two percent reported no change in gift flow compared with last year's 25 percent.

Additional information about operating charity investment performance, asset allocation, governance and related topics follows.

Returns

Cultural organizations' returns averaged 15.1 percent, religious institutions averaged 15.3percent and social service organizations averaged 14.8 percent. As previously noted, when data are viewed by size of organization, charities with assets under $101 million returned an average of 16.5 percent; organizations with assets between $101 and $500 million returned 15.1 percent; and organizations with assets over $500 million secured a return of 13.4 percent.

Also as mentioned, by asset class/strategy, domestic equities returned 31.1 percent; international equities, 17.3 percent; alternative strategies, 10.5 percent; short-term securities/cash/other, 0.0 percent; and fixed income, -0.7 percent.

Within the broad alternatives category, distressed debt produced the highest return, at 15.6 percent. This was followed by marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives), at 13.5 percent, and by private equity (leveraged buyouts, mezzanine debt, M&A funds and international private equity), at 10.3 percent. Venture capital and private equity real estate (non-campus) both generated a return of 9.9 percent, while energy and natural resources returned 5.0 percent. The only negative return among alternative strategies came from commodities and managed futures, at -7.1 percent.

Asset Allocation

At December 31, 2013, participating institutions' asset allocations (with comparable FY2012 returns in parentheses) were:

Domestic equities: 25 percent (22 percent)

Fixed income: 20 percent (22 percent)

International equities: 20 percent (19 percent)

Alternative strategies: 28 percent (31 percent)

Short-term securities/cash/other: 7 percent (6 percent)

(While 72 percent of the operating charities that participated in last year's Study took part once again this year, changes in participant composition year over year can, in certain instances, affect the data. Such is the case with the alternative strategies allocation; a matched sample shows a higher 34 percent allocation to alternative strategies among institutions participating in both Studies. The matched sample shows an 18 percent fixed income allocation and a 4 percent allocation to short-term securities/cash/other, both somewhat lower than data gathered from this year's participants. The full Study notes those instances where there are meaningful differences in data from FY2012 to FY2013 owing to changes in the composition of Study participants.)

Spending

Among participating operating charities, spending as a percentage of assets-the effective spending rate-was 4.7 percent, unchanged year over year and down modestly from 4.8 percent in FY2011. (Since most nonprofits use a multi-period smoothing rule to calculate annual endowment spending, operating charities' effective spending rate-their spending as a percentage of assets-often moves inversely with the direction of annual investment returns.)

Social service organizations reported the highest effective spending rate, at 5.4 percent, while cultural organizations' effective spending rate was 4.7 percent and religious institutions reported an effectivespending rate of 4.2 percent.

When the data are viewed by endowment size, organizations with assets under $101 million had the highest effective spending rate at 5.2 percent. Charities with assets over $500 million reported an effective spending rate of 4.7 percent, while those with assets between $101 and $500 million reported the lowest effective spending rate, at 4.3 percent.

Debt

Continuing the deleveraging trend of recent years, for FY2013 the 24 operating charities reporting that they carried debt had an average debt of level of $39.8 million and a median debt level of $10.7 million. Last year's comparables were average debt of $50.4 million and median debt of $13.8 million.

Of 22 responding institutions with debt, 14 percent increased their debt load in FY2013 while 50 percent decreased it. Thirty-six percent reported no change.

Resources, Management and Governance

The number of full-time professional operating charity staff members devoted to investments averaged 1.5 full-time equivalents (FTEs) versus last year's average of 1.4 FTEs. Twenty-two percent of Study participants reported having a chief investment officer, down from 25 percent a year ago. Eighty-two percent of Study participants reported using a consultant, all but unchanged compared to last year's 83 percent. Twenty-two percent of respondents said they have substantially outsourced the investment function, while another 12 percent said they are considering substantially outsourcing the function.

Ninety-seven percent of Study participants reported having a policy for handling conflicts of interest, down one percentage point since last year's Study.

The average number of voting members on investment committees declined this year to 7.5 from last year's 8.1. The average number of investment committee members who are investment professionals was 4.9 versus 5.0 last year, while those with alternative strategies experience rose to 3.5 this year from 3.0a year ago.

Research Process and Methodology

The design of the Commonfund Benchmarks Study of Operating Charities took place in the winter of 2013. Field interviews with the participating institutions followed in the second and third calendar quarters of 2014.

Participating institutions were interviewed by two techniques: telephone interviews and an online instrument. The respondents were the individuals most knowledgeable about investment matters at participating institutions.

Data from the research population were segmented by type of institution-cultural, religious and social service organizations-and by size into organizations with assets over $500 million, institutions with assets between $101 million and $500 million, and institutions with assets under $101 million.