Knight Foundation's portfolio performed well in 2006, both in absolute terms and in relation to its investment goals.
The portfolio returned 13.71 percent (net of investment management fees) last year, its fourth consecutive year of double-digit growth. At year end, the portfolio's market value was more than $2.26 billion, a new high, having grown by $191 million, net of $104 million in grants and administrative expenses of $11.7 million. In addition, the foundation's beneficial interest in charitable remainder trusts increased by $9.5 million to $80.8 million, bringing total assets to more than $2.34 billion, also a new high.
INVESTMENT RETURNS
The strong performance of global equity markets in 2006 in response to robust economic growth had much to do with the portfolio's performance. Indices for U.S. equities returned approximately 16 percent, European equities, 34 percent, Japanese equities, 6 percent, and emerging market equities, 33 percent. U.S. investment-grade bonds returned 4.3 percent.
In this environment, the foundation obviously benefited from its policy of allocating a high percentage of assets to equity and equity-like investments. With 2006 inflation at 2.6 percent, the portfolio substantially exceeded the foundation's real return objective of 5.5 percent. Because that increases the purchasing power of the assets after grants and expenses, the foundation has the opportunity for higher grant spending in the future. The actual portfolio returns, while still subject to adjustment for fourth quarter nonmarketable returns, lagged that of the Policy Portfolio by 50 basis points, due mainly to an overweight to Japanese equities.
ASSET ALLOCATION AND ASSET CLASS PERFORMANCE
The asset allocation targets (see pie chart) illustrate the foundation's strategy of diversifying the portfolio into five broad investment categories. The benefit of participating in such a wide range of investment opportunities was evident in 2006, as performance differed dramatically across these categories. The Global Equity Portfolio provided the highest return, 21 percent, boosted by a 39 percent return from emerging markets, while the Hedge Fund program, from which Knight Foundation seeks less volatile absolute returns, generated a strong 14 percent return. These performances more than offset returns of 6 percent and 5 percent from the Fixed Income and Inflation Hedging portfolios.
IN SUMMARY
Even with the strong performance of the portfolio and the general market conditions, the foundation's overall investment objectives remain the same. After four years of above-average returns, fueled by rising global equity markets, no investment category appears to offer compelling value today. We expect double-digit returns will be harder to achieve in the coming years. Thus, Knight Foundation's objectives are to remain highly diversified, and to focus on manager selection and disciplined rebalancing - the likely keys to successful portfolio management in 2007.
1 The final number will be somewhat higher because this return assumes no fourth-quarter return from the nonmarketable portfolio, since data on private investment partnerships is only available one quarter later.
