Third Quarter Gives Back Some of 2023 Gains
The Grantmaker Investment Value Index (“GIV”) fell 2.9% in the third quarter pulling down year-to-date performance to an estimated 8.2% after a strong start to the year. Foundation investment performance annualized at 6.0% per year for the ten years ended September, 2023, modestly ahead of the required 5% payout ratio, but still well below the 60/40 mix (the traditional mix of 60% S&P 500 and 40% Bloomberg Aggregate Index) performance of 7.7%. While the difference of 1.7% might seem modest, over 10 years it accrues to about 40% of cumulative underperformance.
U.S. equity markets gave up some of the gains from earlier in 2023, dropping 3.3% in the quarter, but still up a healthy 13.1% for 2023. International developed markets performed a little worse than the U.S., falling 4.1% in the quarter, bringing year-to-date gains to 7.1%. Emerging market stocks continue to struggle, down 2.9% in the third quarter and up an anemic 1.8% for 2023.
U.S. high grade bonds provided no respite from weak equity markets, dropping 3.2% in the quarter, placing them 1.2% underwater in 2023, though high yield bonds held up, notching a gain of 0.5% in the quarter and 5.9% in the nine months to September 30, 2023.
Asset Class Returns
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 11.9% (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 a solid second place.
As one can see Emerging markets were a poor asset allocation choice for the decade, with annualized returns of just 2.1% and volatility greater than U.S. Equity markets.
Over the 10-year period to September 2023, U.S. equities delivered more than 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.