Investment returns for nonprofit healthcare jump

By Ret Boney

Nonprofit hospitals and health-care groups made more money on their investments in 2006, reversing three straight years of diminishing returns, a new study says.

As a whole, the sector earned 10.6 percent on its operating funds in 2006, up from 6.3 percent in 2005, says the 2007 Commonfund Benchmarks Study Healthcare Report.

Returns for the sector’s other class of investable assets, known as “defined-benefit pension funds,” were even higher at 12.5 percent last year, compared to 7.7 percent in 2005.

“The five years we’ve had since 2003 have been very kind to all investors, particularly those who are well-diversified, have good advice and can take a thoughtful approach to asset allocation,” says John Griswold, executive director of the Commonfund Institute, which sponsored the report.

And health-care institutions are beginning to be more aware of the need to do all of that, he says, particularly diversification into alternative investment categories.

Among investment vehicles, international equities were the top performer, with a 24.7 percent return, the study says, followed by 13.9 percent for domestic equities and 11.7 percent for short-term securities, cash and other investments.

Within the alternative-strategies class, private-equity real estate was the strongest performer, with an average return of 17.1 percent, followed by private equity at 11.3 percent.

Combined investable assets for the 184 groups surveyed totaled $944 million, up from $886 million last year.

The majority of those assets were placed in traditional investments, with an average of 35 percent in fixed income and 31 percent in domestic equities, the study says.

International equities garnered 14 percent of assets, followed by 13 percent for alternative strategies, for which seven in 10 dollars were invested in marketable alternatives.

International equities and alternative strategies appear to have boosted performance, with allocation to this class among the top 10 percent of performers reaching 24 percent, compared to 14 percent for participants overall.

“In principle, and for the longer term, this diversification into alternatives has been very beneficial for them,” says Griswold.

The average operating budget for the overall group stood at $882 million in 2006, up from $802 million in 2005, but the average operating margin dropped to 3.6 percent from 4.6 percent over the same period.

Fundraising was strong among nonprofit health-care groups, with almost half the respondents reporting increases in gifts and donations, the study says, with an average increase of 104 percent.

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