Healthcare Nonprofits Post Strong ROI in 2010

The average return on investment for a sample group of nonprofit healthcare organizations in fiscal year 2010 was 10.9%, a study shows.

The 2011 Commonfund Benchmarks Study Healthcare Organizations Report found that the 90 nonprofit healthcare organizations examined continued "a welcome follow-on" to the average 18.8% return posted in FY2009. The returns for FY2009 and FY2010 represent the best back-to-back annual performance in the nine years that the study has been conducted, and a dramatic shift from the investment returns of FY2008 that plummeted by an average of -21.2% in the recession-wracked year, the study showed.

John Griswold, executive director at the Wilton, CT-based Commonfund Institute, said that two years of strong returns are a positive development for nonprofit healthcare organizations. But they barely moved trailing three-year returns into positive territory while leaving five-year returns in the 4% range.

"Continued strong performance will be needed to cover healthcare organizations' spending from endowment, investment management costs and inflation," Griswold said in a media release. "If we go back to the study for FY2007 ­before the losses of FY2008­ trailing returns for three- and five-year periods were 9% and 11.1%, respectively. Returns at levels such as these are essential to support the missions of the nonprofit healthcare organizations over the long term."

The 90 nonprofit healthcare organizations represented $102.6 billion in investable assets and $42.3 billion in defined benefit plan assets. Investable assets include endowment/foundation funds, funded depreciation, working capital and other separately treated assets.

Griswold said that larger healthcare organizations with assets over $500 million reported average margins of 4.4% for FY2010 while those with assets under $251 million reported margins of 2.3%. "It appears that large hospitals and health systems have been able to reduce their operating expenses, increase operating efficiencies and capture greater economies of scale," Griswold said. "Healthcare reform­ -- specifically lower reimbursements -- ­pressures healthcare organizations to control costs, and will likely make them more reliant on support from their investable assets."

Most healthcare organizations saw moderately lower returns on their investable assets in FY2010, when compared with other nonprofit sectors. The 175 independent and community foundations participating in the Commonfund Benchmarks Study Foundations Report posted an average return of 12.5% for FY2010.

The 69 charities participating in the Commonfund Benchmarks Study Operating Charities Report produced an average return of 11.6% for FY2010.

"Historically, healthcare organizations have higher allocations to fixed income securities than do foundations and operating charities, and in a good environment for equities that allocation likely served as a drag on relative return," Griswold said. Healthcare organizations' average 37% fixed income allocation in FY2010, compared to a 13% allocation among foundations and 20% among operating charities.

Domestic equities provided the best return in FY2010, with an average of 17.8%. Other asset class returns were international equities, 12.8%; alternative strategies, 9.9%; fixed income, 7.8%; and short-term securities/cash, 1.1%.

Within the larger alternative strategies category, the best returns came from distressed debt, 15.6%; commodities and managed futures, 15.4%; and energy and natural resources, 14.2%. Marketable alternative strategies ­including hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives­ returned 7.4%, the study showed.

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