Foundations Post Slashed Gains in 2014 | Chief Investment Officer

US-based foundations suffered lackluster returns in the 2014 fiscal year due to muted global equity markets, while increasing their payout rates, according to Commonfund.

In a joint study with the Council on Foundations, Commonfund found foundations’ 2014 returns were less than half of that in the year prior.

Specifically, 142 private foundations reported an average return of 6.1% for 2014, down from 15.6% for 2013. The 102 community foundations—organizations raising funds for charitable grants—averaged 4.8% in returns for 2014, compared with 2013’s 15.2%.

Over the longer term, private foundations tended to report better performance than their community counterparts, the report said.

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For the trailing three- and five-year periods, private foundations gained an average of 11.1% and 9.2%, while community foundations averaged 9.2% and 8.7%, respectively.

Despite lower returns in 2014, nearly 60% of both types of institutions reported increasing their grant making or mission-related spending, according to the report.

Commonfund found private and community foundations upped their spending by an average of 21.1% and 33.9% respectively.

“This research shows that foundation leaders continued to invest in communities through steady mission-related grant making, even though their 2014 returns were affected by subdued global equity markets,” said Vikki Spruill of the Council on Foundations and John Griswold of Commonfund.

Furthermore, the average annual spending rate for both private and community foundations in 2014 was essentially unchanged since the year prior, holding steady at 5.4% and 4.8% respectively.

“It is clear that foundations are maintaining or increasing their grant making dollars to support essential services at a time when public spending is under pressure,” Spruill and Griswold said.

According to the report, domestic equities produced the highest return for foundations in 2014, at around 10%, followed by alternatives generating around 4% in gains.

Participating private foundations were most heavily allocated to alternative strategies—at 44% in 2014—while community foundations were most allocated to US equities at 34%.

Commonfund foundations

This week’s dramatic volatility in US stock markets has created plenty of anxiety, but for one sector of asset management—risk parity—it’s been an opportunity to shine.

“This is why we do this,” Jeff Knight, Columbia Threadneedle Investment’s global head of investment solutions and asset allocation, told CIO. “The merits of risk parity as a volatility-stabilizing strategy have been evident in this turmoil.”

The fundamental premise of risk parity—that concentration of risk, particularly in domestic equities, can be dangerous—is becoming increasingly important, Knight argued.

With less exposure to equities than a traditional 60/40 portfolio, risk parity strategies are likely to experience lower volatility and vulnerability to potential dramatic underperformance, he added.

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“The merits of risk parity as a volatility-stabilizing strategy have been evident in this turmoil.”Furthermore, risk parity may be better positioned to deal with choppy stock markets, thanks to rising risk premiums, according to Bridgewater Associates Co-CIO Bob Prince.

Returns for the firm’s All Weather strategy were comparable to that of a traditional portfolio so far this year, Prince said, “because the main driver of asset returns has been a moderate rise in risk premiums, which impact both a balanced portfolio and the traditional mix similarly.”

“Going forward, if equities fall due to weaker growth, this would have little impact on our All Weather portfolio, and we would be earning the higher risk premiums which now exist,” he added.

Knight also emphasized the importance of striking the balance of harnessing risk premiums and avoiding drawdowns.

“If there is a ‘dip’ to buy, risk parity would offer a more compelling menu of opportunities across assets,” he argued. “The real power of this strategy is that there’s a chance to exploit that efficient participation in risk premiums. But at the end of the day, risk parity is a risk-taking strategy. Investors ought to expect periods where you make money and periods where you see drawdowns.”

“Going forward, if equities fall due to weaker growth, this would have little impact on our All Weather portfolio, and we would be earning the higher risk premiums which now exist.”Indeed, the past 12 months overall have not been friendly for risk parity.

According to consulting firm Redington’s July report, risk parity lost 5.4% in the year ending June 30—using Salient’s risk parity index—second only to commodities in terms of poor performance.

“Risk parity is a long-only strategy that is designed to deal with market volatility,” said Scott Wolle, Invesco’s CIO for global asset allocation. “We’re not too worried about the stock market in the short term. We have other parts of the engine firing to cushion drawdowns in down markets.”

The same Redington report also found risk parity was a top performer over the 10 years to the end of June, with a 6.7% annualized return and Sharpe ratio of 0.64.

“Risk parity investors think they can do the same or better than the 60/40 portfolio over long periods of time, but without the wild ride,” NEPC’s Kristin Reynolds said. “We saw that this year—though returns have been negative—and particularly in the last couple of days.”