A new survey from Captrust Financial Advisors of some 150 public and private foundations finds that 73% of organizations had return expectations in the 5% to 8% range, and 11% expressed return expectations of greater than 8%.
For the five- and seven-year periods ending Dec. 31, 2017, the median net-of-fees return reported was 7.2% and 6.9%, which was reasonably in line with expectations.
However, the 10-year median return reported was only 5.1%, well below cited return expectations, owing to the 2008 financial crisis.
The survey focused on smaller organizations, some 70% of which had less than $50 million in assets. Sixty-three percent of respondents identified their organizational mission as charitable, most often tied to health and social issues.
"We saw a need for a nonprofit survey to provide insights into the $10 million to $100 million segment, which we think is underserved and has unique needs," Captrust's asset-liability practice leader Grant Verhaeghe said in a statement.
"The survey statistically validated a number of things we are hearing from clients and uncovered several issues that deserve more conversation. This segment of the market is very fragmented, so it's not surprising to see so much inconsistency."
Three-quarters of respondents defined their investment objectives as "benchmark relative." Forty-three percent said it was inflation plus spending plus expense, and 26% said absolute return.
Respondents' most common definition of risk was volatility of investable assets, while the least common one was volatility of spending. About half of respondents expressed concern about declines in spending due to portfolio losses, but not to volatility itself.
Forty-four percent of respondents said they were willing to lose only up to 5% of their portfolio values, while 56% were willing to lose 5% or more to accomplish their return objective. Captrust noted that based on their reported asset allocation, most respondents would have historically experienced far greater losses than their expressed willingness indicated.
Asset Allocation
The survey found considerable variation in asset allocation among respondents, and this was not necessarily tied to return and risk objectives. Indeed, the most conservative responses with respect to willingness to experience loss had more aggressive asset allocations that those with more moderate risk tolerance.
Of the respondents that said they allocated to alternatives, 39% cited real estate, 32% hedge funds, 25% commodities and 24% private equity.
