On the rise
Strong returns show pre-recession business reviving
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