The research arm of the Commonfund Institute has released the results of a survey of nonprofit health care organizations, showing that their average investment returns in FY2011 were: zero. It would have been worse than this flatline, but for the attachment of these organizations to the allocation of a large portion of their portfolios to boring old fixed-income assets.
Eighty-six organizations participated in the survey, answering questions about a range of issues involving both investable assets (endowment/foundation funds, funded depreciation, working capital, and separately treated assets) and the return on defined benefit plan assets. The news from the DB plan assets is not as gloomy as that from the investable assets. The DB assets of the surveyed firms returned 1.3% in 2011.
In both cases, the 2011 results were a fall from double digit returns the preceding year. Investable returns were 10.9% in FY 2010. DB returns were 12.3% that year. The organizations surveyed managed a total of $99.8 billion in investable assets and $42.4 billion in DB plan assets as of the end of 2011.
Commonfund also reported on the asset allocations among organizations surveyed. Their allocation to alternative investment strategies is on the rise, growing to an average of 21% in FY2011, whereas it was just 17% in FY2010.
"This increase in the allocation to alternatives is an ongoing trend that mirrors what we have found in recent annual studies of colleges and universities,” Commonfund Institute’s executive director, John S. Griswold, said in a press release. The trend toward alternatives is much further along in the latter case than in the former. The most recent study of colleges indicated that their average allocation to alternatives is 53%.
Nonprofit health care organizations also reported that they allocated 36% of their investable assets to fixed income assets in FY2011. In other sorts of nonprofit, this number is a good deal lower. Among operating charities it is 22%. In educational institutions, it is only 10%. The high level of fixed income investments in the health care world may reflect their capital intensive nature.
Returns by Asset Class
It is good that the stuffy old healthcare organizational folks stuck with fixed income investments!, because those investments did better than any other asset class as a component of their FY2011 returns. Fixed income returned 5.4% to these institutions. Alternatives returned 3.9%. Short-term securities/cash, and domestic equities, were both very close to flat lines. International equities were the big loser, with a -10.9% return.
Within the world of alternative strategies, Commonfund provides some further breakdown. The best returns came from private equity real estate (14.1%). Venture capital also did well, at 11.1%. Private equity returned 10.7%.
But the largest category of alternatives strategy for most such institutions is that called “marketable alternatives,” and this returned -1.8%. “Marketable alternatives” include hedge funds, derivatives, and 130/30.
Budgets and Gadgets
The capital budgets of the health care nonprofits contracted 30% year-to-year, from an average of $143 million in FY2010 to $99.9 million in FY2011. Commonfund offers the hypothesis that this happened because there aren’t enough new instances of the shiny expensive gadgets that healthcare professionals require.
Or, in more decorous terms, this decline reflected a “slowing in expenditure after years of heavy investment in medical and information technology.”
The size of the organization matters to its capital budgeting decisions. The average capital budget of those organizations with assets in excess of $1 billion was $173.3 million in FY2011, while that of the smaller organizations, those with assets under $251 million, was just $8.2 million. Commonfunds frets that this “may not enable them to remain competitive."
Meanwhile, operating budgets increased, and overall operating margins have remained unchanged.
How many employees do healthcare organizations hire to manage their investment functions? The average among those surveyed was 1.6 full-time equivalents in 2011. This is up (from 1.5 FTEs) the year before. Meanwhile the average number of seats on investment committees declined slightly.This article was originally published on AllAboutAlpha under the title: Healthcare Nonprofit Investments: The Case for Boredom
Tags: active management , alternative investments , Commonfund , endowments , foundations , healthcare firms , institutional investors