What happens to philanthropic foundations in a bear market? It’s a question that nonprofit leaders are asking these days. For years—in some cases, decades—the nation’s largest foundations have been able to count on big returns in the stock market. But according to one estimate, during the first half of 2022, U.S. foundation assets fell by 17.3 percent, or about $235 billion. And many of their grantees—from prestigious university professors to small soup kitchens—will soon feel the squeeze.

The long bull market, which dates back to the 1980s, has spoiled people into thinking that stock values always go up, and the Federal Reserve has encouraged that illusion. Now that the market is turning, many foundations will face a rude awakening. In 1980, after a decade of inflation and falling stock prices, the Ford Foundation closed offices around the world and cut back its grantmaking substantially.

Recent losses have shed light on how foundations manage their money. According to a group called FoundationMark that tracks endowments, U.S. foundations lost an estimated $20 billion by hiring money managers to oversee their assets instead of investing in low-cost, stock market index funds. That number does not account for the fees managers charge—typically between 1 percent and 2 percent of assets’ value.

The booming stock market has allowed foundations to engage in more risky investments, too, socking away hundreds of millions of dollars into hedge funds whose managers charge substantially more in fees. Those decisions may also end up in significant losses to the endowment interest that foundations use to pay their grantees.

The bull market has also enabled foundations to make political decisions with their money. Avoiding large market sectors like fossil fuels or pharmaceutical companies is possible when all stocks are gaining value but is a faulty strategy when only those sectors are experiencing growth. Investing solely in companies whose staff you deem sufficiently diverse or whose statements on equity and inclusion check the boxes on your list is easy in boom times. So-called socially responsible investing seems sensible until it means you can’t fulfill your financial obligations to the charities you support.

The Ford Foundation’s Mission Investments portfolio invests in “affordable housing, diverse fund managers, financial inclusion, quality jobs, and health tech.” According to the foundation’s website, its “affordable housing fund managers have helped preserve over 23,000 rental units for families across the United States.” To critics skeptical that these investments would generate good returns, the foundation brags that the Mission Investments fund “generated a compound annual return rate of 28% from its inception in 2017 through 2021.” Given that the S&P 500 doubled between January 2017 and December 2021, that’s not much of an accomplishment. Ford was riding the bull market, but how will its portfolio perform when the market is not doubling every four or five years? And what will its grantees say when the dollars start to disappear?

Just as these dismal returns come in, some foundations are supporting projects to undo what they see as capitalism’s harmful effects. The Omidyar, Hewlett, and Ford Foundations, for instance, are trying, in the words of the Chronicle of Philanthropy, “to persuade Americans to think anew about ways capitalism can become more just.” Their chosen means include “college textbooks, policy journals, documentary films, and podcasts.”

The foundations gave more than $700,000 to start CORE (Curriculum Open-Access Resources), and to produce an online introductory textbook called The Economy, which “challenges the assumptions of neoliberalism, which favors free markets, deregulation, and limited government spending.” CORE’s website declares that a “radically transformed economics education can contribute to a more just, sustainable, and democratic world.” It’s hard to say whether such education will result in contributions to the endowments of more uber-wealthy liberal foundations.

It’s not a new observation to say that America’s wealthiest foundations were built thanks to the principles of free markets, deregulation, and limited government spending. Successful businessmen like Henry Ford and John D. Rockefeller created nest eggs of billions of dollars for generations of philanthropists, who subsequently turned their backs on these principles. But what if, in order to continue their generous habits, these foundations still need a strong free-market economy, with increasing GDP and significant corporate growth? The leaders of these philanthropies take wealth for granted and assume that good times will continue no matter how much we handicap the market system.

They say that their radically transformed economics education will promote a just, sustainable, and democratic world. Maybe. But will it produce a wealthier world, one that continues to innovate and make progress in medicine, technology, and higher standards of living? Probably not—and a poorer world will likely be less charitable and democratic.

Photo: Stas_V/iStock


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next