Nonprofit health-care organizations reported flat investment returns in 2011, continuing a three-year slide in financial portfolios that are now beginning to employ riskier strategies to improve gains, according to data released Wednesday.
The 86 nonprofit health-care groups that participated this year in the decade-old Commonfund Benchmarks Study of Health-Care Organizations also reported declining debt and a reduction in capital spending on medical and information technology.
“A zero return is better than a negative, but it’s not going to keep you above your spending plus inflation,” said John Griswold, executive director of Commonfund Institute, in Wilton, Conn.
The flat returns in 2011 follow two years of declining—though healthy—double-digit gains for health groups. The study reported that the zero return in 2011 followed investment gains of 18.8 precent in 2009 and 10.9 percent in 2010.
Over the past five years, the average annual return was 1.8 percent—a period that included a 21.2-percent loss in 2008, the height of the financial crisis.
Last year’s zero return was not surprising to Mr. Griswold and others.
“The bottom line that I hear from everybody is that they have never seen the environment more unstable than it is right now,” said Bruce McPherson, chief executive of the Alliance for Advancing Nonprofit Health Care, which was not involved in the study. “In the current state of our economy, I don’t know how anyone can very intelligently make great investment returns.”
Taking on Risk
The Commonfund report stated that the “most important shift to emerge” in 2011 in the investment strategies of nonprofit health-care organizations was a shift to somewhat riskier “alternative” investments that have long held large allocations for the portfolios of “colleges, universities, foundations and operating charities.”
Such alternatives include real estate, venture capital, private equity, and hedge funds, Mr. Griswold said.
The participating organizations reported having a total of $99.8-billion in “investable assets” such as endowment funds. In 2011, those organizations invested 21 percent in alternative strategies, up from the average allocation of 17 percent in 2010. Investments in domestic stocks declined over that same period from 24 percent to 20 percent.
The risk of investing in alternatives such as venture capital or real-estate funds is that the money is locked in for years, making it unavailable to the organizations. Nonprofit health-care organizations traditionally have sought to keep more of their investable assets in cash than higher-education institutions do, because it allows them to access the money for operational needs, Mr. Griswold said.
Colleges and universities invested far more—53 percent on average in 2011—in alternatives, the study reported. But the upward trend in alternative allocations by health-care organizations means the more successful “endowment model” is taking root, Mr. Griswold said. The endowment model requires diversifying investments beyond stocks and bonds and becoming comfortable with not having access to cash that is invested in alternative, longer-term funds, according to Commonfund.
“You’ve seen endowments and foundations embrace more alternatives, and their [better] returns reflect that,” he said. “They’ve been rewarded for investing in more risky strategies.”
Still, health-care organizations invest far more in fixed-income assets, such as bonds, than do colleges or universities. Health-care groups allocated 36 percent to fixed income, compared to 10 to 22 percent for colleges and universities and operating charities, the study reported.
Fixed-income investments provided the best return in 2011, at 5.4 percent, for nonprofit health-care organizations. Alternative investments record the next best result, 3.9 percent. Returns for 2011 were flat because of domestic and international equities and cash investments, the study found.
In the study’s other findings:
- Operating budgets averaged $1.52-billion, up 31 percent from 2010 and a 61-percent increase over 2009.
- Capital budgets declined to an average of $99.9-million in 2011, down from $143-million in 2010. Smaller organizations—those with assets under $251 million—“spent an average of just $8.2-million, a level that may not enable them to remain competitive,” the study states.
- Debt declined for 49 percent of the reporting organizations. The average debt level in 2011 was $723-million, down from $1 billion in 2010.
- Larger organizations, those with more than $1-billion to invest, performed better than smaller operations. They also employed more investment firms.
- Defined-benefit plan assets—pension funds—recorded a 1.3 percent average return in 2011, down from the 12.3 percent average return in 2010.