On the rise

Strong re­turns show pre-re­ces­sion busi­ness re­viv­ing

Modern Healthcare - - The Week In Healthcare - Me­lanie Evans

Hos­pi­tal and health sys­tem in­vest­ments de­liv­ered strong re­turns for the sec­ond straight year af­ter fi­nan­cial mar­ket up­heaval dur­ing the Great Re­ces­sion sent port­fo­lios into a dive, a newly pub­lished sur­vey found.

In­vest­ment port­fo­lios posted an av­er­age re­turn of 10.9% for the year that ended last De­cem­ber among 90 not-for-profit hos­pi­tals and health sys­tems with as­sets of $102.6 bil­lion polled by Com­mon­fund, an in­vest­ment ad­viser and man­ager based in Wil­ton, Conn. The prior year’s sur­vey, which in­cluded re­sponses from 85 hos­pi­tals and health sys­tems, re­ported an av­er­age 18.8% re­turn on in­vest­ments.

That’s com­pared with the sharp 21.1% drop re­ported by those sur­veyed on 2008 re­turns.

“Never in 35 years in the busi­ness has there ever been any­thing like this,” said Vince Sch­mitz, se­nior vice pres­i­dent and chief fi­nan­cial of­fi­cer for Mul­ti­Care Health Sys­tem in Ta­coma, Wash. “It was a pan­icked time,” he said, ex­plain­ing that the sys­tem pulled as­sets out of eq­ui­ties in or­der to hold onto cash for cap­i­tal projects un­der way as the re­ces­sion wors­ened, and is just now re­turn­ing to the stock mar­ket.

Re­sults of the Com­mon­fund sur­vey, in­deed, sug­gest a re­turn to the prac­tice of buy­ing or sell­ing as­sets, such as stocks or hedge funds, based on per­for­mance and in­vest­ment pol­icy.

The prac­tice, known as re­bal­anc­ing, is a strat­egy to en­sure port­fo­lios match in­vest­ment tar­gets out­lined un­der in­vest­ment poli­cies, which typ­i­cally limit the per­cent­age of as­sets that can be poured into var­i­ous in­vest- ment cat­e­gories, such as eq­ui­ties, al­ter­na­tive, cash or fixed-in­come in­vest­ments. Slightly more than three out of four re­spon­dents, 77%, said they re­bal­anced port­fo­lios in 2010.

Wil­liam Jarvis, a man­ag­ing di­rec­tor and head of re­search for the Com­mon­fund In­sti­tute, the in­vest­ment ad­viser’s re­search arm, said mar­kets’ pre­cip­i­tous slide in late 2008 and early 2009 made not-for-prof­its more re­luc­tant to re­bal­ance and ab­sorb un­ex­pected losses as as­set val­ues dropped.

The an­nual sur­vey did not ask hos­pi­tals about re­bal­anc­ing dur­ing 2009, but 69% re­ported re­bal­anc­ing in 2008 com­pared with 87% in 2007 and 83% the pre­vi­ous year.

Tom Dodd, pres­i­dent of the Strat­ford Ad­vi­sory Group, a Chicago in­vest­ment con­sult­ing firm, said that he has seen re­bal­anc­ing re­sume but also that hos­pi­tal gov­ern­ing boards have made changes since the skit­tish days of the credit cri­sis. Some hos­pi­tals have adopted in­vest­ment poli­cies that al­low port­fo­lios to stray slightly far­ther from in­vest­ment tar­gets be­fore reach­ing a thresh­old that would re­quire re­bal­anc­ing.

Jarvis said the in­crease in such ac­tiv­ity last year sug­gests not-for-prof­its re­called the po­ten­tial ben­e­fits of re­bal­anc­ing, which prompts in­vestors to sell as­sets that have made gains in or­der to buy po­ten­tially un­der­val­ued as­sets. More re­bal­anc­ing also re­flects mar­kets’ re­bound, he said.

One mea­sure of the re­bound for mar­kets and hos­pi­tal bal­ance sheets has edged in re­cent months to­ward a mile­stone. The Dow Jones In­dus­trial Av­er­age one day last week closed up roughly 94% from the bot­tom the in­dex reached dur­ing the Great Re­ces­sion af­ter the near-col­lapse of fi­nan­cial mar­kets.

The Dow’s drop to a 12-year low March 9, 2009, un­der­scored ex­treme mar­ket volatil­ity that helped to swiftly and sharply drain cash from not-for-profit hos­pi­tal bal­ance sheets. As mar­kets and the econ­omy re­cover, so have hos­pi­tal cash re­serves that dwin­dled per­ilously low and prompted some to de­lay or can­cel con­struc­tion and other cap­i­tal projects.

Nonethe­less, gains have not erased the losses, said Verne Sed­lacek, pres­i­dent and CEO of the

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