Nonprofit health-care returns drop

By Ret Boney

Investment returns for nonprofit health-care organizations in the U.S. dropped last year, but a growing number of groups report their income generated from investments is increasing, a new report says.

The average return on operating funds for the group fell to 6.3 percent last year from 8.2 percent in 2004, says the Commonfund Institute’s Benchmark Study Healthcare Report 2006.

“Health care continues to lag in diversification, and the returns mirror that,” says Dennis Doody, managing director for health care at the institute.  “To increase overall returns, they need to continue to diversify their portfolios.”

But Doody says some diversification is occurring.

More than eight in 10 organizations rebalanced their portfolios in 2005, compared with three in four the year before, with a continued trend toward alternative investments.

Investment in alternative strategies, which grew to 15 percent of the average portfolio from 10 percent, came at the expense of domestic equities, which dropped to 34 percent from 30 percent, and fixed-income, which fell to 34 percent from 41 percent.

However, the smallest healthcare groups, those with total assets from $51 million to $100 million, reduced their reliance on alternative strategies to 6 percent of their portfolios from 9 percent, the study says.

International investments also gained favor last year, representing 12 percent of the average portfolio, up from 10 percent in 2004.

Within alternatives strategies, hedge funds lost ground, dropping to 58 percent from 73 percent the previous year, but remained the most popular investment vehicle, followed by private equity and venture capital.

More than one in three groups overall saw increases in gifts and donations they received, the study says, while slightly fewer saw decreases.

While the average return fell, the overall group’s investment income as a percentage of net income grew, the report says, and the size of gifts and donations received across all organizations was up 111 percent.

The study analyzed information from 202 nonprofit health-care groups with combined operating funds of $105.8 billion and a total of $45.4 billion in defined-benefit pension funds.

Performance of defined-benefit pension funds, held by almost three in four nonprofit health-care groups, also fell, posting an average return of 7.7 percent, down from 10 percent in 2004.

Across all organizations, investment income made up 43.5 percent of net income, the report says, with almost half the groups reporting an increase in investment income over 2004 and almost six in 10 of the largest groups reporting growth.

Almost all organizations studied say they have conflict-of-interest policies, the report says, and half allow their board members to do business with the groups they serve.

More than four in 10 do not allow certain types of investments, including tobacco, prohibited by nine in 10 prohibit, and alcohol, prohibited by four in 10.

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