It’s the latest sign of the OCIO industry’s expansion: More private and community foundations are hiring an outsourced investment office, according to a recent annual report on those institutions by the Council on Foundations and Commonfund.
The percentage of their investment management that foundations outsourced has always been high and it continued to marginally climb last year. Private foundations outsourced 90 percent of their investment management, up from 89 percent in 2022, and community foundations outsourced 92 percent, up from 90 percent.
Unsurprisingly, the smaller the institution, the more they outsourced. The private foundations and community foundations with less than $101 million in assets outsourced 93.8 percent and 94.3 percent, respectively. The ones with assets between $101 and $500 million outsourced a little less; 88.3 percent and 90.2 percent, respectively, according to the survey of 291 organizations with combined assets of $126 billion. (There was not enough data to analyze institutions with assets over $500 million, the report said.)
But the structure of the outsourced arrangements is slowly shifting. Thirty-nine percent of private foundations and 43 percent of community foundations said they used an OCIO to manage their investment portfolio in 2023, up from 36 percent and 41 percent, respectively.
OCIOs still are the most common structure under which foundations’ portfolios are managed. Other structures include an investment committee supported by an internal finance team (18 percent of private foundations and 33 percent of community foundations); a hybrid of an OCIO and investment committee (18 percent of private and 11 percent of community); a non-outsourced internal investment office with a CIO (12 percent of private and 4 percent of community); and smaller percentages of other structures that survey respondents didn’t detail.
Investment consultants, which also often have a significant OCIO business, are bigger and more influential than ever. In 2023, Mercer bought Vangaurd’s OCIO business and Bank of America’s OCIO added 100 new clients. More recently, Cambridge Associates acquired Swiss consultant SIGLO, giving it a physical presence in the country and creating a more formidable combined force to win opportunities with new clients. Meanwhile, the returns gap between the best and worst OCIOs is the widest it’s been in years and some are under pressure or have closed. But as fiscal years come to a close and returns are reported, the annual returns only tell part of a story; 10- and 20-year returns are really what matter most.
Although, private and community foundation portfolios did well in 2023, like those of independent day and boarding schools and university endowments.
The average fiscal 2023 return on endowed funds for the 182 private foundations was 12.6 percent, up significantly from the -12 percent return reported for 2022. The 109 community foundations returned an average of 14.1 percent compared with -13.3 percent in 2022. (All return data reported net of fees.) It was the second year in a row that returns swung more than 20 percentage points.
The 2023 returns bolstered longer-term ones. Ten-year average annual returns remained steady at 7.1 percent, down from 7.3 percent, for private foundations and 6.2 percent for community foundations, down from 6.4 percent.Despite reporting the lowest average one-year returns, Private foundations with more than $500 million in assets posted the lowest average one-year returns, but had the highest average 10-year returns at 9.2 percent. All other institutions, across types and sizes, reported 10-year returns between 6.1 percent and 6.8 percent.
For the second year in a row, more than half of participating community foundations reported a decrease in gifts and donations in 2023, but gifts can be a lagging indicator, Communfund’s report explained. Inflation was another factor, the asset manager said. Just over half (51 percent) of community foundations said that giving declined in 2023 (compared to 63 percent in 2022) and 36 percent said it increased (29 percent in 2022).
“Despite year-to-year volatility in the markets, this year’s report shows what we know to be true: private and community foundations are primed and positioned for the long term, and it pays off. Findings regarding financial returns were positive across private and community foundation segments and across time horizons,” the report said.
