Investment bankers: They are not delivering value to foundations
With a collective $800 billion in assets under management, America’s big foundations spend vast sums of money to buy investment advice. They’re getting little, if anything, of value in return.
Their own investment offices, and the Wall Street banks, hedge funds, private equity firms and consultants they hire, when taken together, deliver investment returns that lag behind market indexes, all evidence indicates.
These foundations would do better to call an 800 number at Vanguard or Schwab and buy a diversified set of low-cost index funds.
So, at least, argues Warren Buffett, one of the great investors of our time. In his latest letter to investors in Berkshire Hathaway, Buffett writes:
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.
The limited data available about foundation endowments bears him out.
It’s not possible to prove that Buffett’s advice would enable foundations to improve their returns–and thus have more money to devote to their grant-making. Most foundations don’t disclose the financial performance of their endowments.
Of the 10 largest grant-making foundations in the US, only two — the MacArthur Foundation and the W.K. Kellogg Foundation — publish investment returns on their websites. MacArthur’s disclosure is exemplary. (So is its performance, perhaps not coincidentally.) I emailed all ten and got nowhere with the rest.
The best evidence about how foundations are managing their endowments comes from an annual study published by the Council on Foundations and Commonfund, a nonprofit asset management fund that serves foundations, colleges and nonprofits. Their most recent survey, which covers the 10-year period from 2006 through 2015, found that returns averaged 5.5 percent per year for 130 private foundations and 5.2 percent per year for 98 community foundations.
Further insight can be gleaned from Cambridge Associates, an investment firm whose clients include foundations, universities and wealthy families. Cambridge tracked the performance of 445 of its endowment and foundation clients and found they generated average annualized returns of 4.97 percent for the 10-year period ending June 30, 2016. (These returns should not be considered Cambridge’s performance track record, a spokesman told me.)
By contrast, Vanguard’s model portfolio for institutional investors, a mix of passively invested index funds, with 70 percent invested in stocks and the rest in fixed income securities, delivered 5.81 percent over the 10-year-period through 2015, and 6.1 percent for the 10-year period ending on June 30, 2016, according to Chris Philips, head of institutional advisory services at Vanguard. (All figures for investment returns are net of fees, meaning fees are taken into account.)
That may appear to be a small edge for Vanguard. But when institutions are investing hundreds of millions, or billions of dollars, small gains compounded over time add up to big money. Money, again, that could be better spent on programs.
Actually, it’s worse, because the figures reported by the Council on Foundations and CommonFund do not include the salaries that foundations pay to their in-house investment offices. The chief investment officers are often the highest-paid executives at foundations, and their deputies do well, too.
Why, then, do foundations continue to pay high salaries and high fees in the pursuit of market-beating returns, when so many fail?