U.S. FOUNDATIONS INCREASE ALLOCATIONS TO ALTERNATIVE STRATEGIES IN FISCAL YEAR 2004; AVERAGE ANNUAL RETURN IS 11.4%

Commonfund Benchmarks Study® - Foundations and Operating Charities 2005 Shows Increase in Use of Hedge Funds; Smaller Foundations Outperformed Larger Foundations

WILTON, CT, June 13, 2005 - U.S. foundations performed respectably in Fiscal Year 2004 according to the Commonfund Benchmarks Study® - Foundations and Operating Charities 2005. The annual study of 317 independent/private, community and operating charities reported an average annual total return of 11.4 percent, compared with 17.0 percent in Fiscal Year 2003. Smaller foundations ($10 - 500 million in assets) generally outperformed larger foundations ($501 million - $1 billion in assets). The average reported three-year return was 7.5 percent, and the five-year return was 3.9 percent.

"The performance of foundations in 2004 shows strength and stability as the markets recovered from three very difficult years (FY 2000-2002)," said John S. Griswold, Jr., Executive Director, Commonfund Institute. "Many foundations reported increases in alternative investments, and should continue to enjoy respectable returns assuming improved diversification, due diligence and good corporate governance."

Average asset allocations in FY 2004 were similar to the previous year. Domestic equities declined to 45 percent from 48 percent. Within domestic equities, large cap allocations were 59 percent vs. 61 percent; mid cap at 9 percent (no change from previous year); small cap at 15 percent vs. 14 percent; and Index at 17 percent vs. 16 percent. Large foundations had the highest allocations to large cap.

There were also modest changes in allocations to fixed income, international equities and cash. Foundations reduced allocations to domestic bonds (82 percent vs. 88 percent the previous year), and increased allocations to global bonds (8 percent vs. 4 percent). In International Equity, there were modest reductions in allocations to Active MSCI (76 percent vs. 79 percent), and modest increases in Passive MSCI and Emerging Markets.

Fewer foundations reported rebalancing their portfolios: 78 percent vs. 83 percent the previous year. The most common approaches were fixed mechanism and tactically flexible, and 50 percent report they rebalance "as needed."

Alternative Strategies Gain
Foundations reported a significant increase in average allocations to alternative strategies over the previous year (18 percent vs. 14 percent). Within alternatives, hedge fund allocations increased to 50 percent from 42 percent among foundations in all size groups. Multi-strategy hedge funds were used most often, followed by long/short equity with 52 percent and absolute return with 45 percent. The largest foundations ($1 billion or more) generally used more hedge funds strategies than smaller foundations.


Comparison of Alternative Strategies Asset Mix* for fiscal Years 2003 and 2004

Foundations reported the highest levels of concern about hedge funds were with oversight, due diligence and risk controls. Allocations to Private Equity Real Estate also increased over the previous year.

Donor Stock
Donor stock was reported by 17 percent of respondents. The average amount of donor stock remained the same; at 25 percent of the portfolio for all size groups. Almost half (45 percent) of respondents said donor stock impacted asset allocation, down slightly from 47 percent the previous year. Donor stock was reported as impacting returns (48 percent); placing restrictions on the disposition of donor stock (42 percent); and that donors played a significant role (64 percent vs. 33 percent the previous year). Foundations with donor stock were more heavily weighted to domestic equities at the expense of all other asset categories. The average return on donor stock in FY 2004 was 9.8 percent; the average 3-year return was 7.5 percent and the average 5-year return was 3.0 percent.

Spending Rates
Almost two-thirds (65 percent) of respondents reported no change in spending rate in FY 2004. One-half (50 percent) of respondents reported that dollar spending increased during this period. Overall, the average spending rate declined to 5.8 percent in FY 2004 vs. 6.3 percent the previous year. Larger foundations ($501 million - 1 billion) reduced spending to 6.3 percent vs. 8.2 percent; and the smallest foundations ($10 - 100 million) reduced spending to 5.3 percent vs. 7.2 percent the previous year. However, midsize foundations ($101 - 500 million) increased spending to 5.9 percent vs. 5.6 percent. More than one-third (35 percent) of respondents reported their policy is to meet the IRS minimum 5 percent spending rate. All foundations expect their budgeted payout for FY 2005 to be below the actual payout in FY 2004.

Gifts and Donations
More than half (57 percent) of all foundations reported increases in gifts. Among the largest foundations, 75 percent reported increases in gifts. One-third reported no change in gifts.

Underwater Funds
Slightly more than one-third of all foundations (34 percent) reported "underwater funds." An average 7.6 percent of foundation assets were reported as underwater. Underwater funds are restricted endowment funds whose market value has fallen below the historic dollar value as defined by the Uniform Management of Institutional Funds Act (UMIFA). Among foundations with underwater funds, 40 percent are spending income only. More than one-half (55 percent) of the smallest foundations are spending income only and 36 percent are no longer spending.

Manager Use
Manager use was fairly stable. Overall, foundations used an average 15.3 money managers, vs. 14.2 the previous year. The largest foundations ($1 billion or more) showed increases in managers reported with 45.3, up from 38.4 in the previous year.

Foundations reported increases in the use of domestic equities and alternatives managers. Domestic equities managers reported were 4.8 vs. 4.0 the previous year; and alternatives managers were 10.1 vs. 8.5. In FY 2005, foundations expect to use more alternatives managers (10.9 vs. 10.1 in FY 2004), and international equities (2.6 vs. 2.4). Manager use for domestic equities and fixed income is expected to remain the same or decrease slightly in the next three years.

Investment Committees
Overall, foundations reported the average size of the investment committee was 6.6 members vs. 6.3 the previous year. There were no significant variations by foundation size. Investment committees at smaller foundations had 6.9 members vs. 6.5 one year ago. Operating charities and community foundations reported an average 8.7 members vs. 8.0. Independent foundations reported an average 5.5 members. An average 3.2 members were investment professionals vs. 3.0 the previous year; and an average 2.4 members had alternatives experience vs. 2.3. Almost half (43 percent) of foundations reported adding non-trustee members to their investment committees. A large majority (79 percent) of community foundations reported they did as well.

Corporate Governance
A large majority (87 percent) of foundations overall reported having conflict of interest policies for their Investment Committee members. All large foundations (100 percent) and 81 percent of small foundations reported having these policies. Almost two-thirds (61 percent) of foundations reported they have a consultant conflict of interest policy. Almost one-quarter (22 percent) of foundations reported allowing board members to do business with the foundation.

The most important risks to the board reported by foundations were risk relative to benchmark (39 percent) and reputation risk (33 percent). 38 percent of larger foundations are more concerned about reputation risk than all other risks. 39 percent of foundations $101 - 500 million and 33 percent of foundations $51 - 100 million are more concerned with compliance risk. About one half of community foundations (56 percent) and operating charities (48 percent) are most concerned with reputation risk.

The Commonfund Benchmarks Study® - Foundations and Operating Charities 2005, sponsored by the Commonfund Institute, surveyed 317 leading independent/private community foundations and operating charities throughout the U.S. with total of nearly $167 billion. The study was conducted through telephone interviews during the fourth quarter 2004 and first quarter 2005. It included 195 independent/private, 61 community foundations and 61 operating charities. All institutions were asked to report their data for the period ending December 31, 2004. The study is conducted annually.

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