Ups and downs

In­vest­ment port­fo­lios see no re­turns in 2011

Modern Healthcare - - THE WEEK IN HEALTHCARE - Me­lanie Evans

In­vest­ments de­liv­ered no re­turns last year for not-for-profit hos­pi­tals and health sys­tems, one snap­shot of the sec­tor shows. The Com­mon­fund In­sti­tute, the re­search arm of the not-for-profit fi­nan­cial man­age­ment and con­sult­ing firm Com­mon­fund, Wilton, Conn., said tax-ex­empt health­care port­fo­lios saw eq­ui­ties drag down the mod­est per­for­mance of short­term se­cu­ri­ties, cash, al­ter­na­tives such as pri­vate eq­uity, and fixed in­come, the last of which had the strong­est re­turns in 2011. Per­for­mance for the year was flat, the in­sti­tute said.

The re­sults, re­leased ex­clu­sively to Mod­ern Health­care, re­flect the mar­ket de­cline in the last six months of 2011 af­ter stronger per­for­mance dur­ing the first half of the year, said John Gris­wold, the in­sti­tute’s ex­ec­u­tive di­rec­tor. “For some rea­son, the op­ti­mism only lasts six or seven months,” he said, re­fer­ring to last year and this year to date.

The 86 hos­pi­tals and health sys­tems sur­veyed by the Com­mon­fund In­sti­tute re­ported an av­er­age -0.2% re­turn for do­mes­tic eq­ui­ties and -10.9% for in­ter­na­tional eq­ui­ties as the U.S. de­bated deficit re­duc­tion and Europe grap­pled last year with its debt cri­sis.

Short-term se­cu­ri­ties and cash de­liv­ered a pos­i­tive re­turn, but only marginally, at an av­er­age of 0.2%. Al­ter­na­tive in­vest­ments, which grew more pop­u­lar last year among health­care in­vestors, posted a 3.9% re­turn on av­er­age. Fixed in­come re­turned 5.4%, on av­er­age.

Al­ter­na­tive in­vest­ments such as hedge funds, real es­tate and pri­vate eq­uity ac­counted for 21% of the av­er­age 2011 port­fo­lio com­pared with 17% re­ported by 2010 sur­vey re­spon­dents. Mean­while, do­mes­tic eq­ui­ties made up 20% of the av­er­age port­fo­lio, down from the 24% re­ported in 2010.

Al­ter­na­tives, though con­sid­ered riskier as­sets, help di­ver­sify a port­fo­lio and can re­duce over­all risk, Gris­wold said, be­cause a di­verse port­fo­lio will have as­sets re­spond dif­fer­ently to changes in the mar­ket and econ­omy.

In 2011, pri­vate-eq­uity real es­tate de­liv­ered the high­est re­turn, at 14.1%, on av­er­age. Ven­ture cap­i­tal and pri­vate eq­uity fol­lowed at 11.1% and 10.7% re­turns, re­spec­tively. Hedge funds and other mar­ketable al­ter­na­tives strug­gled with a -1.8% re­turn.

Health­care or­ga­ni­za­tions sur­veyed by the Com­mon­fund In­sti­tute re­ported a com­bined $99.8 bil­lion in as­sets.

Catholic Health Part­ners, a 29-hospi­tal sys­tem based in Cincin­nati, di­vides its port­fo­lio equally among fixed in­come, eq­ui­ties and al­ter­na­tives and saw a -1% re­turn for the year that ended in De­cem­ber, said Jerry Judd, vice pres­i­dent of trea­sury for the sys­tem.

Judd said the rally last year in U.S. Trea­suries boosted the sys­tem’s fixed-in­come re­turns; how­ever, that rally was off­set by the sys­tem’s ex­po­sure to in­ter­na­tional eq­ui­ties. He de­scribed 2011 as a “more chal­leng­ing year” but said ex­ec­u­tives aren’t un­nerved by a sin­gle year’s re­turns.

Catholic Health Part­ners ex­ec­u­tives, Judd said, di­ver­sify the sys­tem’s port­fo­lio to weather chang­ing mar­kets and in­vestor anx­i­ety that can influence re­turns, as hap­pened in 2011.

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