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Not-for-prof­its see much bet­ter re­turns in ’09: re­port

Modern Healthcare - - The Week In Healthcare - Melanie Evans

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.

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