Following the path of other higher-education and foundation endowments, U.S. nonprofit health-care groups saw their combined average annual investment returns plunge 21.2 percent in fiscal 2008, a new report says.
That’s the largest drop in returns in the report’s seven-year history, and down significantly from a positive return of eight percent in fiscal 2007, says an analysis of 143 nonprofit hospitals and health organizations conducted by the Commonfund Institute.
Performance of defined-benefits plans fared even worse, posting an average annual return of negative 26.3 percent in 2008.
“Nobody was immune,” Bill Jarvis, managing director of the Commonfund Institute, says of nonprofit institutions. “This is a set of results that will affect spending, investment practices and missions in the nonprofit sector for quite a while.”
While all asset classes posted negative returns for nonprofit hospitals last year, international equities led the retreat with a loss of 41 percent, followed by domestic equities, which fell 37.4 percent.
Alternative strategies, a perennial high-performer, posted returns of negative 19 percent.
Changes in market values of investments, coupled with the rebalancing of portfolios, resulted in notable changes in asset allocations.
Nonprofit hospitals, which typically are heavily invested in fixed income and less weighted toward equities, generally extended those strategies.
Overall, fixed-income investments rose to 39 percent of assets in 2008 from 32 percent in 2007.
Meanwhile, 24 percent of assets were invested in domestic equities, down from 31 percent in 2007, and international equities fell to 12 percent of assets from 15 percent.
An analysis of the sector’s top 2008 performers shows an asset-allocation strategy that, in previous years, likely would not have led to positive returns, says Jarvis.
“Temporarily, that more-fixed-income-based strategy would have outperformed an equity-based strategy,” he says. “But we don’t think that’s a good model for the future.”
With 73 percent of assets invested in fixed income, the top-performing 10 percent of hospitals posted an average annual return of negative 2.2 percent.
Yet that risk-averse strategy did not help hospitals much during the downturn, and likely meant smaller gains during boom years, says Jarvis, noting that losing 50 percent of one’s investment takes more than a 50 percent gain to recoup losses.
“I think these [investment] committees need to think about what the upside and downside experience has been and question whether those large fixed-income allocations performed as intended,” he says.