Foundation Portfolios Rose 4.3% in Third Quarter
The Grantmaker Investment Value Index (“GIV”) rose 4.3% in the third quarter, bringing year-to-date performance to 13.6%. Foundation investment performance annualized at 7.2% per year for the ten years ended September 30, 2024, ahead of the required 5% payout ratio, though well below the 60/40 mix (the traditional mix of 60% S&P 500 and 40% Bloomberg Aggregate Index) performance of 8.9%. While the difference of 1.7% per year might seem modest, over 10 years it accrues to about 20% of cumulative underperformance.
U.S. equity markets have been very strong in the first nine months of 2024, notching year-to-date performance of 22.1%, and the index is 36% higher than a year ago. International developed markets rose an impressive 7.3% in the third quarter, and are up 13.0% since the beginning of the year. Emerging market equities were the best asset class in the third quarter, posting a gain of 8.7%, however, long term, they have been the biggest laggards over the past decade, annualizing at just 4.0%, versus the S&P 500 at 13.4%. Put another way, if you invested $100 in emerging markets 10 years ago, you would have $148 today, but if you had put that $100 into the S&P, you would have $350, or 2.38 times higher..
U.S. high grade bonds also had a big quarter after a tepid first half, returning 5.2% in the third quarter, bringing year-to-date gains to 4.4%. High yield bonds returned 5.3% and 8.0% 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 13.4% (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 only significant 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 and High Grade Bonds were the worst asset classes and poor asset allocation choices for the decade, with annualized returns of just 4.0% and 1.8% respectively. Adding insult to injury, Emerging Markets had the highest volatility among the asset classes.
Over the 10-year period to June 2024, U.S. Equities delivered double the return of international stocks cumulatively 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.