The average market value of The Commonwealth Fund’s endowment rose from $667.3 million to $724.4 million in the fiscal year ending June 30, 2014 (Exhibit 1). Over the last 15 years, and despite the financial markets crisis of 2008—09, the Fund has maintained the purchasing power of its endowment, and over the last 33 years, has been able to restore much of the purchasing power lost in the long market slump of the 1970s. During the 2013—14 fiscal year, the foundation expended $31 million in pursuit of its mission of advancing a high performance health system (Exhibit 2).
The net return on the Fund’s endowment over the 12 months ending June 30, 2014, was 13.6 percent (Exhibit 3). Reflecting risk control features of the Fund’s investment strategy, the endowment’s return during the year was well below that of the market benchmark (13.6% vs. 18.2%). Due to risk controls, the endowment tends to underperform in strongly up markets like the recent one, while outperforming in strongly down markets. Over the long term, the Fund’s investment returns have been better than those of the market, as well as considerably, and consistently, less volatile (Exhibit 4).
The Fund’s outsourced chief investment office Investure pursues a diversified investment strategy for its 13 clients, summarized in Exhibit 5. The firm regularly monitors five risk metrics for the Fund’s portfolio: geographic net exposure, leverage, liquidity, private partnership exposure, and capital structure (asset class allocation). At least 30 percent of the Fund’s portfolio is to be held in investment vehicles with lock-ups of 12 months or less, and 60 percent with lock-ups of 60 months or less. Under normal circumstances, the net asset value of private partnership holdings plus unfunded capital commitments to partnerships is not to exceed 65 percent of the endowment.
Under Investure’s management, performance of the endowment is measured against a passive benchmark reflecting target portfolio allocations and against a benchmark consisting of the Fund’s spending rate plus inflation. Investure seeks to avoid annualized shortfalls exceeding 3 percent, relative to the mean return of large endowments over rolling 10-year periods.
In addition to the careful selection of managers within its global equities, alternatives (hedge fund), and private equities pools, Investure has achieved strong returns in recent years through concentration with top managers, directly executed investments (beginning with fixed income and broadened to include passive equity, currency trades, and rate options), reducing fees and improving terms in both its public equities and private partnership portfolios, and pursuing co-investment opportunities with private partnership managers. The firm also opportunistically backs start-up investment teams emerging from existing investment management firms.
Three considerations determine The Commonwealth Fund’s annual spending policy: the aim of providing a reliable flow of funds for programs; the objective of preserving the real (inflation-adjusted) value of the endowment and funds for programs; and the need to meet the Internal Revenue Service requirement of distributing at least 5 percent of the endowment for charitable purposes each year.
Like most other institutions whose sole source of income is their endowment, the Fund had to adjust spending plans to the new realities resulting from the 2008—09 financial markets crisis (Exhibit 6). The endowment having recovered significantly from losses during the financial crisis, the Fund is now able to increase its annual budget modestly, and expects to spend $176 million over the five-year period ending June 30, 2019.
As a value-adding foundation, the Fund seeks to achieve an optimal balance between its grantmaking and intramural research, communications, and program management activities, while minimizing purely administrative costs. Recognizing that data on expenditures reported in the IRS 990-PF annual tax return inadequately reflect the purpose of many expenditures, the analysis in Exhibit 7 sorts out the foundation’s 2013—14 expenditures according to four categories recommended by the Foundation Financial Officers Group: direct public-benefit activities (extramural grants and intramurally conducted programs, such as research, communications, and fellowships); grantmaking activities, including grants management; general and administrative activities; and intramural investment management.
In 2013—14, the Fund’s total direct public benefits activities accounted for 84 percent of its annual expenditures. Value-adding oversight of grants took up 9 percent of the Fund’s budget, and the intramural costs of managing the endowment, 1 percent. Appropriately defined, the Fund’s administrative costs amounted to 6 percent of its budget.
Given strong investment returns and still subdued inflation, the Fund is fortunate in continuing to have the resources needed to maintain its role in helping inform health policy debates and promote a high performance health system.