Investors can realize gains on appreciated assets and may defer the payment of those capital gains taxes until as late as December 31, 2026.
Those deferred gains will receive increases in basis: 10% after five years invested in the QOZF and a further 5% after year seven. This effectively lowers the taxes due by 15%.
The appreciation of the QOZF investment itself is tax-free if held for ten years or more.
About the Survey
The proprietary FEG Community Foundation survey collects insight on spending policies, asset allocation, and current industry trends. The survey was open to all U.S. Community Foundations from March 4, 2019, to April 5, 2019.
Completed primarily by senior-level investment decision makers, 112 foundations across thirty-five states participated this year. Thirty-five of the participants were FEG clients. A majority of participants use a traditional consulting model, while nearly 30% use either an outsourced CIO (OCIO) or hybrid consulting model.
Asset sizes ranged from less than twenty-five million to greater than one billion. To best communicate the survey results, participants were grouped into the following asset categories: less than $25 million, $25-$50 million, $51-$100 million, $101-$250 million, and greater than $250 million.
Consistent with previous surveys, investment staffing continues to be limited. More than 75% of respondents have one or less full-time equivalent (FTE) to administer the investment portfolio. Nearly 80% of community foundations also expect staffing to the remain the same.
Asset Allocation / Performance
Smaller organizations displayed a strong home country bias within equities, with 47% percent of the portfolio allocated domestically. The difference between small and large organizations also can be seen within private investments and hedge funds, where allocations range from 0-6% and 2-11%, respectively.
Overall sentiment has shifted away from alternatives; smaller organizations showed a strong preference for non-alternatives.
The median one-year performance for respondents was 7.2%, while the median ten-year performance was 7.4%. The effects of the Great Financial Crisis (GFC) fell off in 2018, which brought long-term returns up to a more palatable level for most community foundations.
New to the 2019 survey was a question around manager diversity, of which only 29% of respondents have either considered or hired diverse asset managers. Of those who have hired, larger community foundations seem to be implementing diverse managers more so than smaller community foundations.
Interest in Responsive Investing (RI) has almost doubled since our 2017 survey. Further, the number of organizations that invest in RI has also nearly tripled—46% of respondents currently have RI within the portfolio.
Organizations use different types of RI, and some have multiple types. SRI/ESG is the most common, of which 30% of respondents have within their portfolio. Although adoption has increased, the overall portfolio allocation to RI remains limited; the highest average allocation was 3.7% within SRI/ESG.
1A Responsive Investment is any investment made by an organization that seeks to gain both financial and social benefit. Program Related Investments (PRI), Mission Related Investments (MRI), Socially-Responsible Investments (SRI), and Environmental, Social, Governance (ESG)
Over the past four years, there has been a consistent reduction in participants with a 5% spending rate. The overall median spending rate was 4.4% and the most common calculation methodology was a rolling twelve-quarter moving average.
While 28% of respondents made changes last year, only 10% foresee making a change to their policy in the near future. The percent of respondents that foresee a change in spending policy has decreased over the past four years.
On average, the overall advisor/consultant fee is twenty basis points while investment manager fees come in at fifty-three basis points. Total OCIO and consulting investment fees—inclusive of manager and custodian costs—are roughly the same, although investment advisor fees are higher in an OCIO model and manager and custodian fees are higher in a consulting model. Investment advsior/consultant fees have an inverse relationship with asset size, decreasing as asset size increases, while investment manager fees seem to be directly correlated to asset size and increase as asset size increases.
More labor-intensive funds, such as scholarship funds, have the highest associated administrative fees. Overall administrative fees stand at 1.27% for all community foundation.
Externally Managed Funds (EMFs)
Nearly 70% of foundations allow for externally managed funds, with an average of eighteen funds and a median of four. The number of EMFs increase as the size of the foundation increases, therefore smaller foundations negatively skew the average.
Investment Committee Structure
Overall, 87% of the respondents have an Investment Committee (IC) separate from the Board. More than half of respondents have between seven and nine IC members, although more than 25% have ten or more.
Thank you to all the community foundations that participated in the survey and contributed to its content. We greatly appreciate the time and energy of those who have participated in the past and look forward to increasing the number of participants and improving the usefulness of the data for community foundations nationwide.
We greatly value your input; if you have questions you would like to be considered for future surveys, please contact us at email@example.com or Devinne Kelly at firstname.lastname@example.org. To watch the webinar replay, download the presentation, or stay informed on the 2020 survey, visit www.feg.com/cfsurvey.
INVESTMENT CONSULTING MODELS
- Traditional Consulting / Non-Discretionary – Traditional consulting is the use of a third party that advises the board/committee on investment decisions but does not have discretionary power.
- OCIO / Discretionary – OCIO is the use of a third party that manages the investment portfolio.
- Hybrid Consulting Model – This is a model that combines traditional consulting and OCIO. The third party advisor advises the board/committee on investment decisions but may also have some discretionary power.
- Investment Manager – A mutual fund manager (ex. Morgan Stanley).
- Agency Funds are established by specific non-profit organizations to provide a source of income for years to come.
- Donor Advised Funds (DAFs) are a separately identified fund or account comprised of contributions made by individual donors that is maintained and operated by a Community Foundation.1 They are used by donors who want to personally recommend grant awards from a fund they set up with the Community Foundation. Donor advised funds are those where the donor has influence/input over granting. Externally Managed Funds (EMFs) are those that are managed by an outside advisor or broker Unrestricted Endowed Funds are set up to let the community foundation make regular withdrawals used for operations, community needs, specific purposes, etc.
- Scholarship Funds are a donation that is set up where the grant making dollars are utilized to provide scholarships to students, and is managed completely by the Community Foundation.
- Supporting Organizations are special types of charitable organizations that, based upon their relationship with the Community Foundation, are themselves classified as public charities. Supporting organizations provide the flexibility desired by donors to meet their objectives.2
RESPONSIVE INVESTING TERMS
- Responsive Investing (RI) - Any investment that seeks to gain both financial and social benefit.
- Program Related Investment (PRI) - PRIs are defined by the IRS tax code. PRI constitutes investments for which the primary purpose is to accomplish one or more of the foundation’s exempt purposes, and for which production of income or appreciation of property is not a significant purpose. A PRI may produce at market, above market, or below market returns. A PRI is eligible to count against the five percent payout that foundations are required to make each year to retain their tax-exempt status. (Adapted from the Internal Revenue Service)
- Mission Related Investment (MRI) - MRIs are market-rate investments that support the mission of the foundation by generating a positive social or environmental impact. These investments are made from the foundation’s endowment corpus. MRI opportunities exist across asset classes in cash, fixed income, public equity, private equity and venture capital, and real estate. (Adapted from Mission Investors Exchange)
- Socially Responsible Investment (SRI) – Considered socially responsible because of the nature of the business the company conducts. This could include negative exclusionary criteria (ex. Exclusion of “sin stocks”) (Adapted from Investopedia)
- Environmental, Social, Governance (ESG) – ESG is a holistic view of all aspects that can impact security value. ESG factors are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues (ex. human rights issues or renewable energy) (Adapted from Financial Times Lexicon)
This report was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department.
The data is obtained from the proprietary FEG 2019 Community Foundation Survey. The study includes a survey of 112 U.S. Community Foundations. The survey was open for responses online from March 4 – April 5, 2019. Participants also had the option to complete as a word document and email the results back to FEG. The data from this survey was grouped into six categories based on assets of the community foundation with assets ranging from less than $25 million to greater than $1 billion. The information in this study is based on the responses provided by the participants and is meant for illustration and educational purposes only.
Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities.
Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that the investment will achieve any particular rate of return over any particular time period or that investors will not incur losses.
Past performance is not indicative of future results.
Investments in private funds are speculative, involve a high degree of risk, and are designed for sophisticated investors.
This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.
The purchase of interests in private equity funds involves certain risks and is suitable only for persons of substantial financial means who have no need for liquidity in their investment, and who can bear the risk of the potential loss of their entire investment. No guarantee or representation is made that the investment will be successful, that the various underlying funds selected will produce positive returns, or that the fund will achieve its investment objectives. Various risks involved in investing may include market risk, liquidity risk, limited transferability, investment funds risk, non-registered investment funds risk, valuation risk, derivative risk, venture financing risk, distressed securities risk, interest rate risk, real estate ownership risk, currency risk, and financial risk, among others. Investors should refer to the applicable Private Placement Memorandum and Offering Documents for further information concerning risks.