Stock market gains strengthened foundation endowments in 2023

The stock market climbed to unexpected heights in the final stretch of 2023, leaving foundation endowments with more money on hand to give in the new year.

Just don’t expect to see it all at once.

The S&P 500 closed the year up 24 percent, defying gloomy financial predictions and boosting the coffers of wealthy foundations, whose assets swung up by 17.3 percent to $1.48 trillion last year, up from around $1.06 trillion in 2022 and a high of $1.45 trillion in 2021, according to one preliminary estimate. Such estimates don’t take into account the effects of inflation, which has risen steadily since 2021.

While the windfall might lead some foundations to give more this year, experts say that most grant makers — which develop financial outlays according to multiyear rolling averages — avoid pegging their giving too closely to the ebb and flow of Wall Street.

“We’re getting to a healthier position now, but this just gets our three-year rolling average a little higher than it was in 2020,” said John Seitz, head of FoundationMark, a company that researches foundation market performance and provided the estimates for 2023. It was a “good year” for markets, he said, but one that roughly evened out the “bad year” that preceded it in 2022, when foundation assets plummeted by nearly 20 percent.

“If markets stay about where they are — so forecasting no gains or losses — we would expect giving to be up by a very small amount in 2024,” said Seitz.

Foundations are required by federal law to distribute at least 5 percent of their assets annually, and few go above that requirement in determining how much to spend because they believe it’s necessary to “preserve the long-term purchasing power of the endowment,” said Phil Buchanan, president of the Center for Effective Philanthropy. While there are some exceptions — like the Gates Foundation’s payout rate of about 10 percent — most grant makers have actually lowered their rate of spending in recent years, falling to 5.2 percent in 2021 from 5.6 percent in 2016, despite their growing wealth.

The exact percentage grant makers decide to distribute is often determined using a three-year rolling average of asset size. By “smoothing out” their disbursements, foundations are able to keep their contributions to grantees relatively stable year after year. .

That’s proved critical during economic crises, as seen in the beginning of the pandemic, when foundation grants helped stabilize floundering nonprofits. Yet it also means that a boost for endowments might do less for grantees than expected amid the current unpredictable economic landscape.

“Even a really, really strong year like 2023 is only going to pull up the grant-making budget by so much” as foundations attempt to budget for a lackluster 2022 and uncertainty over what’s to come, said Buchanan: “By the time 2025 rolls around, the two years may have canceled each other out.”

How much the stock market affects a foundation’s endowment may also depend on its size and investment portfolio. Foundations with less than $100 million in assets often have more than half of their endowments invested in publicly traded stock, said George Suttles, executive director of the Commonfund Institute, the research arm of Commonfund, an asset-management firm.

While grant makers of that size may have more money at their disposal when the market is up — or less when the market is down — big foundations tend to have a more diversified portfolio, with “other pockets of liquidity” like bonds, gold, or real estate that “they can leverage to maintain payout outside of a boost in public equity,” said Suttles.

And though asset growth does play a role in determining how much foundations give, almost none will see their endowment swing as sharply as the stock market itself, whose growth last year was highly concentrated in just a few volatile tech stocks, said Norman Nabhan, a managing director of Morgan Stanley’s Graystone Consulting business, where he manages foundation investments.

He expects his clients — whose assets grew by up to 14 percent last year — to increase their rate of giving in 2024 only modestly, so long as the economy remains stable.

Following nine straight weeks of market gains at the end of last year, equities lost traction during the first few days of trading in 2024, with wobbling big tech stocks largely to blame.

But there are reasons for optimism, too, said Suttles: the market has typically performed well during presidential-election years, and the Federal Reserve has signaled that it is poised to lower interest rates, which could also help keep stocks afloat.

It’s difficult to say exactly what’s in store for the economy in 2024 and how it will affect foundations and their grantees, many of whom are now struggling for revenue.

This time last year, few could have predicted that the stock market would end on a high note, said Paul Schervish, director of the Center on Wealth and Philanthropy at Boston College.

“Every once in a while, somebody gets this correctly,” he said. “But nobody knows what’s going to happen.”

From The Chronicle of Philanthropy