Canada’s endowments, foundations and not-for-profits are worried that weak investment returns will leave them without sufficient funds to fulfill their missions in a period when the global economy and financial markets are increasingly volatile, according to a survey released by global consulting firm Mercer.
Endowment boards are facing many challenges in order to meet the expectations of donors and beneficiaries, Mercer notes.
The survey reveals that 50% of respondents cite fund returns insufficient to meet their objectives as their greatest risk over the next several years, followed by the ability to maintain beneficiary distributions, cited by 35%.
Mercer surveyed 27 Canadian endowments and foundations with total assets of $4 billion and funds ranging in size from $5 million to over $1.1 billion. The survey covered the participating funds’ policy asset allocations, performance, spending policy, governance, responsible investment policies and investment implementation.
Concerns about insufficient returns are justified, Mercer says. It notes that returns have fallen short of being able to meet typical objectives for spending, inflation protection, and provision for their operating expenses.
Data show the median investment return for the 10 years to Dec. 31, 2011 was 4.3%, with 10-year returns ranging from 3.6% to 6.2%. In comparison, the Mercer Balanced Pooled Fund Universe median return was 5.5% and the corresponding passive benchmark return was 4.7% over the same time period.
Frank Belvedere, mercer partner responsible for the firm’s endowment consulting practice in Canada, says the sector is feeling the pressure. “Long-term returns have not justified or supported historical spending and distribution levels and the sector is beginning to recognize this,” he says.
Equities remain the dominant asset class for long-term or endowed funds with an average allocation of 57% followed by bonds at 33%, and real estate and other alternative investments totalling 10%.
Short-term asset allocation is dominated by bonds at 83% of total assets, with the remaining assets in equity and alternative investments.
Funds exceeding $250 million have a higher allocation to alternative investments at the expense of a lower bond allocation than do smaller funds. Alternative assets are mostly in real estate, infrastructure, hedge funds, and private equity.
Three-quarters of respondents reported having a formal ‘spending’ or beneficiary distribution policy, but only 56% relate their spending policy to their investment policy allocation. And 73% intend to review their policy in light of the current market environment.
The survey noted a distinct trend for the sector to incorporate responsible investing (RI) and environmental, social and governance (ESG) considerations into their investment processes.
“Survey results suggest community, health and education-focused endowments and foundations are reviewing the extent to which potential ESG risks and investment opportunities are impacting their portfolios” says Jane Ambachtsheer, Mercer’s Global Head of RI. “Nearly three-quarters of education and health sector respondents indicated that they planned to review RI and ESG objectives in the coming 12 months.”
Mercer is a wholly owned subsidiary of Marsh & McLennan Cos. (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital.