America's Foundations: A Tale of Lost Returns in a Quest for Superiority

The nation's most prominent foundations, entrusted with managing vast sums of assets, find themselves grappling with a challenging and intricate predicament. Despite making substantial investments in expert advice and forging partnerships with renowned Wall Street institutions, encompassing banks, hedge funds, and private equity firms, the returns they garner frequently fail to meet expectations. This situation should logically prompt foundation investment offices to thoroughly reassess their strategies; however, this reevaluation has not been widespread.

Financial commentators, like Larry Swedroe, offer an alternative path to better returns, advocating for the consideration of low-cost index funds readily available through reputable companies like Vanguard or Schwab. These passive approaches have consistently outperformed actively managed ones, providing foundations with a reliable avenue to optimize risk-adjusted rates of return and ultimately enhancing their ability to fulfill their philanthropic missions.

The challenge is further exacerbated by the lack of transparency surrounding most foundations' financial performance. While some, like the MacArthur Foundation and the W.K. Kellogg Foundation, have embraced transparency by publishing their investment returns, the majority prefer to keep their results away from public view. This lack of disclosure raises questions about the overall effectiveness of their investment strategies.

However, the limited data available indicates that in their pursuit of superior returns through active managers and hedge funds, foundations tend to achieve poorer performance instead. Despite their allure, these high-risk, high-reward strategies typically yield poor returns for foundations, reducing the resources that otherwise would have been available for their core philanthropic mission. Ironically, the very pursuit of exceptionalism inadvertently diverts them from the path of more dependable, passive strategies. Vanguard's institutional model portfolio, predominantly composed of low-cost index funds, has consistently demonstrated outperformance, even during market fluctuations, reinforcing the potential benefits of passive approaches.

It is essential for foundations to critically assess the implications of their choices. The time has come for them to embark on a comprehensive reevaluation of their investment strategies. Embracing passive approaches not only streamlines their decision-making process but also frees up valuable resources for their primary mission: making a profound and meaningful impact on society. By shifting away from the relentless pursuit of high performance and adopting a more prudent approach, foundations can steadfastly focus on their philanthropic goals and effectively maximize their positive influence on the world.

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