Back in black
Not-for-profits see much better returns in ’09: report
Not-for-profit hospital and health systems in 2009 regained most of the prior year’s investment losses, but portfolios have not fully recovered and annual returns, on average, have been roughly flat since 2007, according to one snapshot of the industry.
Equities, international and domestic, led the 2009 rebound with average returns of 37.3% and 31.2%, respectively, and only three investment vehicles—private equity real estate, venture capital and private equity— had negative returns compared with 2008, when not one asset class showed gains, according to the most recent results from the annual Commonfund Institute survey.
Among the 85 hospitals and systems surveyed by the Commonfund Institute, the research arm of the not-for-profit investment manager Commonfund, Wilton, Conn., the average annual return for the year that ended Dec. 31, 2009, was 18.8%.
That’s compared with the 21.2% drop in fiscal 2008 as financial markets faltered.
Verne Sedlacek, president and CEO of the Commonfund, said the recent market volatility has left tax-exempt healthcare organizations with five-year average annual returns that do not keep pace with inflation and capital or other spending needs. Hospitals and systems typically seek long-term returns of 4.5% plus inflation, he said. In 2009, the average annual five-year return was 3.5%. Sedlacek said organizations responded to markets’ volatility by shifting more assets into fixed income.
Michael Manning, the deputy treasurer for Partners HealthCare System, said risks within the healthcare industry—not investment markets—have prompted the 10-hospital system to scale back its exposure to equities to reduce volatility. Manning said the hospital sector faces greater risks as public and private insurers face cost pressures. Partners shifted some of its portfolio into investments such as commodities and other real assets, he said.
The Boston-based Partners saw its long-term assets return 24% as of Dec. 31, 2009, compared with a negative 27.9% the prior year, he said.
With less exposure to equities comes lower expected returns, Manning said, which may leave Partners with less money for capital without strategies to offset the more-modest gains. The system is undertaking a multiyear planning effort and reviewing its options, he said.
Patrick Burke, head of investment manager Vanguard’s not-for-profit group, said the strain on balance sheets from markets’ drop in 2008 and early 2009 has left organizations equally concerned about volatility and liquidity of investments. Not-for-profits also adjusted investments against the risk of inflation, but more recently have grown wary of the risk of deflation, he said.
The hospitals and systems in the Commonfund survey reported a combined $76.8 billion in assets in 2009, which includes working capital, funded depreciation, endowment and foundation funds and other separately treated assets.
Fixed income accounted for 41% of investments; domestic equities, 22%; international equities, 15%; alternatives such as real estate, commodities and distressed debt, 15%; and short-term securities and cash, 7%.
Alternatives had an average return of 17% but within the asset class, private equity real estate, venture capital and private equity declined 25.8%, 10.5% and 7.2%, respectively. The category was boosted by commodities and managed futures, 32%, energy and natural resources, 28.2%, and distressed debt 20.8%.
The average 2009 return for fixed income was 11.7% and cash 1%.
Commonfund surveys hospital and system defined benefit pension plans separately. Pension portfolios had a total of $26.8 billion in assets and reported an average annual return of 21.5% after dropping 26.3% the prior year.
Sedlacek: Five-year returns aren’t keeping up with inflation.
Burke: Strain has produced volatility, liquidity concerns.