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Markets drive down health-care returns

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Ret Boney

Weakening financial markets in 2007 drove down investment returns for health-care organizations to 8 percent from 10.6 percent in 2006, a new study says.

But overall performance likely would have been worse had health-care groups not expanded their investments in alternative strategies, which fared better than any other asset class, earning an overall return of 12.8 percent, up from 11.7 percent in 2006.

Health-care groups’ use of alternative investments jumped in 2007, with the average portfolio investing 17 percent of its investible assets in alternative strategies, up from 13 percent in 2006, the study says.

“As recently as five years ago, that allocation was 8 percent,” says Bill Jarvis, managing director and head of research for the Commonfund Institute, which published the report. “So it has more than doubled in five years, and that diversity benefit is what you’re beginning to see.”

Returns for both domestic and international equities held by the study’s 179 health-care groups, representing combined investible assets of $135 billion and defined-benefit plans of $55.7 billion, fell by over half in 2007.

But the move away from the traditional stock and bond markets protected the downside for health-care groups last year, says Jarvis.

“What we see with more traditional portfolios is they tend to be more volatile because they move more with the stock and bond markets than do more diversified portfolios,” he says. “A portfolio that is well diversified in asset classes not correlated with liquid U.S. markets probably will not share in that volatility as much.”

Among alternative investments, energy and natural-resources investments were the best performers in 2007, bringing in 21.5 percent, followed by distressed debt, which earned 19.2 percent.

The diversification that led health-care groups away from traditional strategies into alternatives will serve them well in today’s chaotic economy, Jarvis says.

“The real task of asset allocation was done carefully by a portfolio committee long before this, with this kind of market in mind,” he says. “If a committee has done its work well, temporary market dislocations shouldn’t trouble them excessively. This is why investment policy is so important.”

The increasing share of portfolios dedicated to alternatives came at the expense of fixed income, which on average dropped to 32 percent of allocations from 35 percent, and cash short-term securities, which fell to 5 percent from 7 percent of portfolios.

Returns on fixed-income investments did rise in 2007, up to 6.5 percent from 4.7 percent in 2006, the study says, but returns on cash and short-term securities fell to an average of 5.1 percent from 8.2 percent.

Debt levels for study participants rose for the second year in a row, with the average organization carrying $580 million in 2007, up from $509 million in 2006, and more than one in three groups plan to increase their debt over the next two years.

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