2016 Endowments and Finance Summit Opening Plenary

Hello, and welcome to New York City. I want to thank you for coming to our second annual Summit focused on finance and endowments.

For many years, the Council on Foundations has helped our foundation members understand important issues related to the management and practice of the great work you do. We’ve developed guides on endowment management, governance, ethics, and endowment performance. We’ve hosted sessions at our conferences on foundation investment practices and helped our members connect investments with mission. Our legal team frequently helps foundation executives understand the requirements of the law, which are particular when it comes to finance.

Four years ago, we began working with the Commonfund Institute on a significant research project that has become the largest and most comprehensive data source on foundation endowment performance and management. In it, you can find information on endowment growth, market growth, impact investing practices, and so much more. This research allows foundations to look at their own endowments in the context of their colleagues.

Last year, the Council experimented with hosting a focused discussion on the financial issues facing foundations, and I was thrilled to see it be such a success. Not only did it provide a unique space to talk about strategic finance at foundations, but it also opened up philanthropy to the press – communicating our transparency and willingness to discuss the big issues facing our field in the bright sunlight. Journalists mentioned to us that it was a strong step toward strengthening public trust in our field.

Now, the Council isn’t and won’t be in a position to tell its members how to manage their finance and investments, but we do want to make sure you have the benefit of your colleagues’ experiences to make well-informed decisions. This Summit embodies that principle, and here we’ve even layered on the wisdom and expertise of some of the country’s most significant financial minds.

At the Summit, you’ll hear from top economists, investment managers, impact investing experts, and many more insightful thinkers. We see this Summit as a continuation, and in some ways, a culmination of the great work the Council has done over the past few years to support foundations with one of their core concerns – their ability to leverage endowed funds for maximum social benefit. That's why we're all here.

None of the programming for the Summit would be possible without the close collaboration of some of philanthropy’s most innovative finance professionals. I would ask that the Summit Working Group kindly stand and be recognized for their commitment to supporting their colleagues.

In particular, I want to thank Stephanie Bell-Rose and Ken Jones, the other Co-Chairs of the Summit. They have gone above and beyond the call of duty over the last few years and played a significant role in building the Council as a strategic leader in the crucial area of investments and finance.

As members of the Council’s Board of Directors, they see the need to get foundation financial professionals together to discuss the strategic aspects of this work. They see the untapped potential of foundation capital. They see the need to have frank conversations about dollars and cents.

Many calls, emails, working group meetings, and video recordings later, they and our working group members have translated that understanding into this Summit, which speaks to the core concerns of foundation leaders.

Throughout the history of America, foundations have sought to balance the success of their missions today with their ability to conduct that same mission in the future. While some foundations are spending down, most continue to exist in perpetuity for the long-term benefit of communities and causes. That means that our field must be vigilant in examining the dynamics shaping endowment performance.

That includes looking at the topics this Summit covers, like investment performance, financial management, the macro-economic forces impacting philanthropy, and threats to endowment on Capitol Hill.

This gathering couldn’t be more timely.

On the screen, you’re reading a recent headline from the Financial Times that came out of a national press breakfast that the Council organized at the Carnegie Corporation of New York about a month ago.

The FT was reporting on the significance of that comprehensive investment performance research, which I mentioned a few moments ago. I want to talk further about some of the results, because they set an important context for our discussions over the next few days.

On the screen you’ll see some of the topline findings. In FY 2015, private foundation’s average investment returns were 0. Among surveyed community foundations, investments’ value declined 1.8%. Despite this poor performance, across the board foundations’ effective spending rate of 5.1% stayed the same as last year, which was a significantly better year for returns. Over the course of this summit, we’ll be talking about whether this is a blip or the new normal.

You’ll have a chance to get more a more in-depth look at the research in a later breakout session, but I would like to frame this morning’s discussion by bringing attention to four of the major issues raised by our research findings.

First, some positive news for communities. Foundations are spending, despite this uncertainty and these long-term implications. Foundations are continuing to invest in their missions and are maintaining consistent spending.

The question this study raises, however, is around the long-term impact on endowment values if foundations don’t experience more favorable investment returns in the near- and mid-term. Two consecutive years of low investment results have reduced foundations’ trailing 10-year returns to the 5.1-5.9 percent range. Without higher long-term returns, it will be difficult for foundations to maintain their endowments’ value once annual spending, inflation, and investment management costs are taken into account.

Second, without better returns, foundation spending increases may be unlikely. Our research showed lowered returns for both private and community foundations for the second straight year. These low returns are also bringing down the five and ten-year averages as well. The teams at the Council and Commonfund both expect we are entering a prolonged period of volatility and low market returns.

That means we have got to be prepared for what’s ahead. We can’t wait until the next big financial event. If we see lower returns years in the near term, it’ll become more difficult to even maintain current spending levels, let alone increase them. Lower returns may mean fewer resources for foundations to invest in their communities without dipping into their corpus. This potentially lessens your ability to invest in the communities and nonprofits that so depend on your work.

The third major issue I want to raise is that all investment asset classes are down. Returns for both private and community foundations were lower compared to last year among each of the five primary asset classes reported on by the Study. As you can see, for the second consecutive year, international equities produced the lowest return, and returns on domestic equities swung sharply from positive into negative territory. This kind of performance is particularly vexing for private foundations, which often set higher investment goals for their investment returns. Typically, they set a goal of CPI + 5% in order to maintain the value of their endowments over time and meet their 5% payout requirement.

Many of you already know that some of these asset classes carry higher risk. So we are left asking, two key questions: “What kind of risk tolerance should foundations adopt going forward?” and “Where should investment committees set their targets?”

The fourth and final major issue I want to raise is, “Are these practices sustainable?” Last year, our researchers observed that lower average annual return for the 10-year period was insufficient to cover annual grantmaking, inflation, and investment management costs. If community foundations and private foundations are getting negative to break-even investment growth, then inflation will likely have its due, eroding the value of the endowment over time. Because inflation is steadily impacting the value of endowments, foundations typically seek returns that keep pace with inflation in order to maintain purchasing power over time.

So foundations face a particular set of challenges. While you're all here to invest for the long term, we still live day to day. The fact that foundations have been able to maintain their current levels of spending is laudable. But is it sustainable? If long-term returns continue to be lower than assumed by institutions’ long-term investment goals, and if spending continues at rates that are not supported by those returns, then the logical result will be a gradual erosion of purchasing power due to inflation and overspending.

There are few issues as fundamental to the life of foundations—and the broader philanthropic sector – as these. Given the seriousness of these issues, it’s really time to consider the implications of what these trends might mean for the work you all do. It’s time for CEOs, CIOs, and CFOs to begin having conversations with your boards and investment committees about these issues – and we know many of you already have and are.

My sincere hope is that this summit will fortify you with the community, tools, expertise, and resources needed to have those crucial conversations. Thanks again for joining us.