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Challenges of Mid-Size Foundations: Returns ― Is 5% Real, Real?

Turning the page on a decade always provides an opportunity for reflection and planning. It is a chance to reflect on success and disappointments and plan for challenges and opportunities to come. From the perspective of the capital markets, the 2010 – 2019 period will be remembered for extraordinary growth.  The S&P 500 Index, a proxy for the U.S. stock market, averaged +13.6% per year ― well above historical averages. The sharp downturn in the equity markets at the start of 2020 has certainly dampened overall returns. Yet, the trailing ten-year average through April 2020 remains well into double digits.

This picture of strength painted by equity market returns over the past ten years contrasts sharply with the growing level of societal concerns over that same period.  According to NASA, 2019 was the second hottest year on record since recordkeeping began in 1880 , as climate changes continue to pose a severe threat to communities around the globe. Income inequality in the United States closed the decade at the highest level since the statistic was first tracked more than five decades ago.  The past decade also saw the rise of movements like the #MeToo and #BlackLivesMatter movements, which brought gender and racial issues to the forefront of our national discussion.

Coincidentally (or perhaps not), there has also been a significant increase recently in the number of foundations in the United States. According to the most recent numbers from the National Center for Charitable Statistics (2015), there are now over 1.5 million IRS-registered non-profits in the U.S, which contributed an estimated $985.4 billion to the U.S. economy in 2015 alone.  As we think about the dichotomy of the above reflections, the importance of our country’s non-profit organizations has never been greater. Investment returns over the decade likely bolstered non-profits’ endowments across the country, leaving them in a unique position to help address some of the world’s most severe and growing issues.

Unfortunately, those issues have grown exponentially in just a few months, as the new decade has brought with it a global pandemic that will change the world as we knew it. The lasting impact of the COVID-19 virus will only further test the strength of our global community, as we come together to face a common enemy and the countless challenges that it will leave in its wake.

At Pathstone, our institutional practice has roots tracing back over more than two decades as a way to support clients in their philanthropic efforts. Today, that practice includes 54 non-profit organizations, mainly private foundations and public charities, which total close to $1 billion in assets.   As we embark on a new year and critical decade, we thought it appropriate to reflect on what we have learned in working with non-profit institutions and outline what we believe will be some of the challenges that these organizations may face in the coming years. The first installment titled “Is 5% Real, Real?” will discuss future market return expectations and how foundation and charities can improve their chances of meeting their spending requirements, even in a low return environment.

In future papers within this series, we will discuss:

  • Spend Down vs. Perpetuity – What is the best path for a private foundation?
  • Ensuring Sound Leadership and Governance as your Organization Grows
  • Tips to Help your Organization Spend More Time on What Really Matters

Enjoy and stay tuned for more!

Please see the PDF version of this article for citations and important disclosures.

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