Foundations Notch a 6.6% Investment Gain in First Quarter
The Grantmaker Investment Value Index (“GIV”) rose 6.6% in the first quarter, continuing the upward trajectory after 2023’s 15.5% gain. Foundation investment performance annualized at 6.8% per year for the ten years ended March, 31 2024, ahead of the required 5% payout ratio, but not after accounting for inflation and still well below the 60/40 mix (the traditional mix of 60% S&P 500 and 40% Bloomberg Aggregate Index) performance of 8.5%. While the difference of 1.7% might seem modest, over 10 years it accrues to about 20% of cumulative underperformance.
U.S. equity markets had a very strong first quarter, up 10.6%, and nearly 30% higher than a year ago. International developed markets posted a gain of 5.8% for the quarter and 15.3% for the year, empirically very strong, but only about half of the S&P 500’s gain. Emerging markets continued to lag the developed world, up 2.4% for the quoter 8.2% for the year. Emerging markets have massively underperformed developed markets over the past decade.
U.S. high grade bonds fell 0.8% in the first, but were up 1.7% over the past year, while high yield bonds returned 1.5% and 11.2% for the quarter and year respectively.
Risk and Return
The chart below shows the relationship between risk and return. In the chart risk is defined as volatility (shown on the x-axis) and return is plotted on the y-axis. Asset classes out to the right (International and Emerging Markets) are more volatile than those closer to the axis (High Grade Bonds). As one can see, over the 10-year period, U.S. Equities were the strongest performer, up 13.0% (y-axis). The dotted line shows an approximation of the average Sharpe ratio which is a measure of risk weighted return. Asset classes above the line delivered better risk/return than those below. U.S. Equity was the lone outlier over the period (which also drove the 60/40), with Hedge Funds approaching the average line.
The GIV Index’s position, below and right of the 60/40 Portfolio indicates that foundations took more risk for less return than the passive 60/40 mix.
As one can see Emerging Markets were a poor asset allocation choice for the decade, with annualized returns of just 2.9% and volatility greater than U.S. Equity markets.
Over the 10-year period to March 2024, U.S. Equities delivered close to three times the return of international stocks with a similar risk profile.
The FoundationMark GIV Index is calculated using FoundationMark return estimates up to and including December 2022 thereafter monthly returns are estimated based on reported asset allocations and market returns. The GIV Index serves as a proxy for foundation performance. Actual performance may differ materially. The GIV Index is updated on a continuing basis and all data is subject to revision.
The 60/40 Balanced Portfolio represents the traditional institutional allocation to equities and fixed income with weightings of 60% in the S&P 500 and 40% in the Bloomberg U.S. Aggregate Index, rebalanced monthly.