The assets of the top 50 European foundations are over ten per cent larger than their US peer group, totalling $147 billion, according to new research into European foundations by Watson Wyatt, the leading global consultancy firm, and Professor Elroy Dimson of London Business School.
However, the research also shows that as a proportion of assets, European foundations devote around 50 per cent less money to charitable giving than their US counterparts.
The research, which investigates long-term investment strategies and their links to spending policy, also found a high dispersion of payout ratios among foundations in Europe, with the aggregate being 2.6 per cent compared to 4.5 per cent in the US.
“It is not surprising that US foundations’ payout ratios are more homogenous, given that tax benefits to US foundations are usually subject to a minimum annual payout of five per cent of the market value of assets,” says Mirko Cardinale, senior investment consultant at Watson Wyatt.
“Arguably, the five per cent rule has not only enabled US foundations to spend more for charitable projects, but also encouraged them to focus more explicitly on maximising investment returns. While the five per cent rule is hardly optimal, we would welcome a more explicit connection between long-term spending and investment returns for European foundations as it would introduce more accountability and investment efficiency.”
According to the research, European foundations still invest around one third of their assets in founder or sponsor stock, although eight of the largest invest more than ten per cent in alternatives such as private equity and hedge funds. The average US foundation allocates nine per cent to alternative assets while US university endowments have diversified significantly more, allocating on average 30 per cent to these assets classes.
The research ranks, for the first time, the top 50 European foundations by assets and finds that Italy and the UK dominate, accounting for 40 per cent and 30 per cent respectively, followed by Germany on 13 per cent. France and Spain rank lowest, mainly due to a history of tight Government regulation in those countries.
“The European element of this research was made difficult by a paucity of information, confirming that transparency and visibility is still very low among European foundations, and by significant disparities in reporting standards,” says Cardinale.
Changes to the Charities Statement of Recommended Practice (SORP [2]) pertaining to reporting and accounting requirements, together with the new Charities Law in the UK, will set higher governance standards,” says Professor Elroy Dimson of the London Business School.
“It is clear from the research that such developments are necessary and desirable if European foundations are to maintain their important role in society.”