Nonprofit health-care groups see lower returns

By Ret Boney

Nonprofit health-care groups reported an average total return on operating funds of 8.4 percent last year, down from 14.1 percent in 2003, a new study says.

The Commonfund Benchmarks Study Healthcare Report 2005, conducted by the Commonfund Institute in Wilton, Conn., analyzed the investments of 197 nonprofit healthcare groups during 2004.

Much of drop in returns is due to a difficult economic environment and lower returns in the markets last year, says John Griswold, executive director of the institute.

“Going forward, the prediction is that we’ll see even lower returns in the markets,” he says, adding that health care should become more aggressive.

“Health care is much less aggressive in exploring the area of alternative investments,” he says.  “That’s not the panacea, but clearly there’s a need to continue to go into those areas.”

Larger organizations, defined as those with operating funds of $501 million or more, averaged a total return of 9.9 percent, while smaller groups reported an average return of 7.3 percent, the study says.

The average operating margin for all groups was 4.9 percent, and income from investments accounted for 37.8 percent of net income.

More than three in four groups rebalanced their portfolios during 2004, the study says, with nine in 10 larger organizations rebalancing, compared to only slightly more than half for smaller groups.

Asset allocation for operating funds changed only slightly from 2003, with groups reporting 34 percent allocated to domestic equities, 41 percent to fixed income, 10 percent to international equities, 10 to alternative investments, and 5 percent to cash or other short-term options.

The average total return for defined-benefit pension funds was 10 percent, down from 18.1 percent in 2003, the study says.

Defined-benefit pension plans allocated 47 percent to domestic equities, 28 percent to fixed income, 15 percent to international equities, 9 percent to alternative investment, and 1 percent to cash or other options.

Operating fund allocations to fixed income did not change in 2004, with 96 percent in domestic bonds, the study says, and the international equity mix also stayed virtually the same.

Larger health-care groups reported a shift of assets to hedge funds, which stood at 68 percent of alternative investing strategies last year, with most of that coming from private equities, which were 5 percent of the allocation.

Defined-benefit pension funds showed a similar allocation shift in the alternative investment category, the study says.

Health-care nonprofits are expecting to shift more of their operating fund investments to alternative strategies, the report says, with larger groups expecting to reduce amounts allocated to fixed income and domestic equity, and smaller groups expecting to reduce cash and other short-term investments.

Overall, four in 10 groups say gifts to their organizations increased, with eight in 10 larger groups reporting increases, and two in 10 reporting no change.

Average debt for all groups was $413 million, with larger groups reporting significantly higher debt than smaller ones, and almost four in 10 groups overall reporting increased debt over the previous year.

More than half the groups say they have restrictions on how they can invest, with almost two in three of those restrictions social in nature, the study says, and larger groups reporting more governance and proxy voting restrictions than smaller groups.

On average, health-care groups employed the equivalent of one full-time staffer to oversee investments in 2004, up slightly from 2003, and investment committees had an average of 8.3 members last year, with an average of three of those being investment professionals.

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