A new look at hospital and health system investment returns in 2008 contains yet another grim snapshot of last year’s economic upheaval.
Bottom line blues
Crisis took big bite out of not-for-profit portfolios
Results of Commonfund’s annual investment survey in not-for-profit healthcare, released exclusively to Modern Healthcare, underscore the significant losses that drained liquidity from balance sheets in the final months of last year as governments struggled to prop up a failing financial system and the nation’s recession sharply worsened (See related story, p. 6). Last year’s average annual return among 143 hospital and health systems that responded was -21.2% in 2008, easily the worst performance since the survey began in 2002.
“No one avoided serious injury,” said Verne Sedlacek, president and CEO of Commonfund, a not-for-profit investment adviser and manager in Wilton, Conn., with roughly $25 billion under management for not-for-profit schools and healthcare organizations, and foundations.
Markets punished investors that took “any kind of risk,” Sedlacek said, from stocks to high-grade corporate bonds. Results were negative regardless of how hospitals and health systems invested. International and domestic equity performance fared the worst, with average returns of -41% and -37.4%, respectively. Alternatives—which have grown increasingly common within healthcare in recent years—also saw returns decline sharply, though not as significantly, by 19%. Even the safest investments—fixed income and cash or short-term securities—slipped, by -0.8% and -1.1%, respectively.
“It’s the opposite of what we’ve been living with for the last four or five years” when markets rewarded risk, Sedlacek said. Indeed, last year’s plunge all but wiped out gains since 2004; the survey’s trailing five-year average return was 1.7%.
Commonfund’s healthcare findings, which reported returns for the year that ended Dec. 31, were only marginally better than its 2008 survey results for foundations, which reported a -26% return, and charities, which found a -25.8% decline.
Such dismal performance added significant stress to healthcare balance sheets and weakened key measures of financial strength across the sector, according to reports from major credit ratings agencies in recent months. Evaporating investment returns slashed liquidity and income from sources other than operations, which were “strong contributors to credit strength in recent years,” Standard & Poor’s noted.
Ratings agencies reported one measure of liquidity—how long hospitals can operate on savings—plunged by a range of 20 days to 45 days, depending on when hospitals or health systems closed their books.
Patricia O’Neill, associate vice president and chief investment officer at Rush University Medical Center in Chicago, said the A3-rated hospital’s thin cash cushion and planned construction forced the 676-bed medical center to cut riskier investments from its portfolio, which totaled $1.32 billion as of Dec. 31, including a $470 million pension fund.
That bolstered its pension funds’ fixed-income investments, which are staggered to mature in line with liabilities, and shifted more of its cash investments into short-term fixed income, she said. The move preserved the medical center’s cash as it turned to bond markets three times during seven months as part of a multiyear construction plan to revamp its campus, but came at an $18 million to $20 million cost as the medical center exited investments at a loss, she said.
Ratings analysts said weaker balance sheets are expected to persist, which could further curb construction or technology investments already delayed or cut back by the downturn.
An analysis of hospital investment plans by Wilshire Associates, a Santa Monica, Calif.-based investment firm, found the median return was nearly -15.2% for the year that ended June 30. That’s compared with -4.5% for the prior year and an increase of 16.1% in 2007. Wilshire also found recent negative returns nearly eclipsed prior gains; the five-year median return among hospital investment plans as of June 30 was 1.81%.
Among Commonfund respondents, market losses helped shift the balance among portfolio assets. Domestic equities accounted for roughly one-fourth of assets compared with 31% in 2007. International equities slipped as well, to 12% of assets, compared with 15%. Meanwhile, the share of assets in fixed income increased to 39% from 32%. Alternatives, such as hedge funds, private equity, venture capital and distressed debt, edged up 1 percentage point to 18% of assets. Cash and other short-term securities account for 7% of portfolios last year from 5% the prior year.
Ben Campbell, president and CEO of Capital Advisors Group, a Newton, Mass.-based investment adviser for operating cash portfolios to corporations and not-for-profits, including health systems, said last year’s volatility exposed overlooked risks.
“There was a false confidence” in the safety and liquidity of investments long considered to be both, such as auction-rate securities and money market funds. As a result, Campbell said, he generally expects investors to pay more attention to preserving capital and liquidity than generating returns. Investments will likely come under closer scrutiny by governing boards, he said. That conservative position may lead to lower returns, though they may improve with economic recovery, he said.
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