U.S. NONPROFIT HEALTHCARE ORGANIZATIONS REPORT AVERAGE INVESTMENT RETURNS ON OPERATING FUNDS INCREASED TO AN AVERAGE 10.6% IN FISCAL YEAR 2006

2007 Commonfund Benchmarks Study of Healthcare Organizations Shows Benchmark Leaders had Returns of 16.4% for Top Decile and 14.6% for Top Quartile with Higher Allocations to International Equities and Alternative Investment Strategies; Forty-Three Percent of Respondents Report an Increase in Gifts and Donations

WILTON, CT, October 8, 2007 – U.S. nonprofit healthcare organizations reported an average total return of 10.6% on Operating Funds in Fiscal Year 2006, according to the 2007 Commonfund Benchmarks Study^® Healthcare Report (CBS Healthcare). This compares with an average 6.3% return reported in FY2005 and 8.2% in FY2004, and is the second highest return reported since the Study’s inception five years ago. The largest institutions with over $1 billion in Operating Funds reported an average return of 12.2% vs. 7.2% the previous year.

Average three-year returns were 8.8% and average five-year returns were 7.3% vs. 10.5% and 4.9% respectively in FY2005. Three-year returns were below the FY2006 return in part because FY 2003’s strong 14.1% return fell out of the average, while five-year returns were lower owing to the -4.9% average return in FY2002.  

The average total return reported for Defined Benefit Pension Funds was 12.5% vs. 7.7% in FY2005 and 10% in FY2004. Three-year and five-year DB returns were 10.3% and 8.1% respectively vs. 13% and 4.6% the previous year.

“The higher returns in 2006 represent a clear – and welcome – reversal from last year’s Study, when returns declined for the third consecutive year,” said John S. Griswold, Executive Director of Commonfund Institute, which sponsors the healthcare study. “This healthier return should help to ease financial pressures – from tight margins to ongoing capital improvement demands – on the nonprofit healthcare organizations that participated in the Study.”

International equities had the highest average performance among asset classes with an average return of 24.7%. In descending order, the other asset class returns were: domestic equities, 13.9%; alternative strategies, 11.7%; short-term securities/cash/other, 8.2%; and fixed income, 4.7%. Within alternative strategies, private equity real estate had the highest average return of 17.1%, followed by private equity, 11.3%; marketable alternatives, 10.9%; distressed debt, 9.1%; and energy and natural resources, 7.9%. 

This fifth annual CBS Healthcare study focuses on the management, investment and operational practices of 184 nonprofit healthcare organizations for the period ended December 31, 2006. Total investable assets averaged $944 million among participating organizations, compared with $886 million in last year’s Study. The two largest components of total investable assets were Operating Fund assets of $592 million and Defined Benefit (DB) pension plan assets with $393 million in market value.

This study joins the other three annual Commonfund Benchmarks Studies of Educational Endowments, Foundations, and Operating Charities.

Institutions in all size categories reported higher returns over the previous year. For most institutions, operating pools include insurance reserves, endowment/foundation assets, funded depreciation asset reserves, working capital and other separately treated assets. Funded depreciation asset reserves and working capital continue to be the largest categories of assets included in operating funds.

Fixed income remains the largest single asset allocation among healthcare organizations, with an average 35% of Study participants’ portfolios vs. 34% the previous year. The other “traditional” asset class, domestic equities, accounts for an average of 31% of operating funds, again basically stable with the previous year’s 30%. International equities and alternative strategies are just a percentage point apart, with 14% and 13%, respectively. Cash and short-term funds account for a surprisingly high 7% – perhaps reflecting a perceived need for cash to fund ongoing maintenance and capital repairs. This allocation, while high, declined from 9% in the FY2005 Study.

Among alternative strategies, average allocations to marketable alternatives were highest, at 70%. The private equity allocation was 9%; private equity real estate was 9%; energy and natural resources were 8%; venture capital was 3%; and distressed debt was 1%. 

































Benchmarks Leaders: International Equities and Alternative Strategies Help Increase Returns
For the first time, the Commonfund Benchmarks Study Healthcare Organizations Report includes an analysis of the top decile and top quartile performers in the overall Study group of 184 organizations. (Top decile and top quartile analyses are already provided in the Benchmarks Studies of educational endowments and foundations). The objective of this analysis is to allow healthcare organizations to gain insight into the practices and policies of their “best of breed” peers.

The Benchmarks Leaders analysis shows that asset size correlates with better returns, but larger size is not a definitive advantage. Top decile and top quartile organizations have higher levels of investable assets and higher defined benefit plan assets than the average among total participants in the Study, but the difference is not completely correlated with their significantly better performance. Investable assets for the top decile group averaged $1.3 billion, higher than the average $944 million for all Study participants. However, average investable assets for the top quartile, at $1.0 billion, were only slightly higher than the average for all participants.

Benchmarks Leaders’ average returns on operating funds in FY2006 were 16.4% for the top decile and 14.6% for the top quartile versus 10.6% for total organizations. Three-year returns on operating funds were 12.3% for the top decile and 11.1% for the top quartile versus 8.8% for Study participants as a whole. Average five-year returns were 9.4% for the top decile, 8.8% for the top quartile and 7.3% for all Study participants.

Asset allocation is the main difference between the returns of Benchmarks Leaders and those of the total respondent group. As has been observed in the endowment and foundation Benchmarks Studies, the Leaders in healthcare have significantly larger allocations to international equities and alternative strategies. Top decile performers had an average international equities allocation of 24%, and the top quartile averaged 22%. By comparison, Study participants overall had an average allocation of just 14% for this asset class.

Fixed income allocation is another significant difference. Overall Study participants allocated 35% of operating funds to fixed income and realized an average return of 4.7%. However, the top decile Benchmarks Leaders allocated only 14% and the top quartile 19% to fixed income, with the remaining funds being allocated to higher-returning asset classes. In addition, in cash and short-term securities, both categories of Benchmarks Leaders averaged just 2 % vs. 7% for all participants.

Manager selection appears not to account for a large portion of the Benchmarks Leaders’ superior investment performance when returns are viewed by asset class. For example, Study participants overall realized an average FY2006 return of 24.7% on their international equities allocation, while the top decile averaged 26.7%, and the top quartile averaged 25.9% returns.  

Budgets and Operating Margins

Operating budgets in FY2006 averaged $882 million, ranging from $128 million among organizations with assets of $51 million to $100 million to more than $2.3 billion among organizations with assets exceeding $1 billion. The average $882 million operating budget is up considerably from last year’s average operating budget of $802 million.

Operating margins averaged 3.6% – a sharp drop from the 4.6% reported last year. Compared with last year, operating margins are down across the board. They declined most steeply among smaller organizations with assets of $501 million to $1 billion, where they fell from 5.6% to 3.3%.  Study participants overall report capital budgets averaging slightly more than $99 million, up from $89 million a year ago.

Gifts and Donations 

For FY2006, participants in the Benchmarks Study generally reported a good year for gifts and donations. Forty-three percent of respondents reported an increase in gifts and donations – up from 35% in FY2005; among these organizations, the average increase was almost 104%.

However, 13% of respondents saw their donations decrease from the prior year – the same percentage as in last year’s study – and among them, the average decline was nearly 29%.  Thirty-eight percent of respondents reported no change in gifts and donations over the year.

Large organizations appear to be better at attracting donations. Sixty-five percent of organizations with assets of $1 billion or more reported increases in gifts and donations during the year, but at the opposite extreme only 10% of the smaller organizations in the $51 million to $100 million range did so.

Debt 

After declining in FY2005, debt levels for healthcare organizations as a whole increased in FY2006, but almost entirely as a result of significantly higher debt among the largest organizations. For all Study participants, the average debt level reported for FY2006 rose by over 28% to $509 million, up from an average of $395 million in FY2005. Organizations with assets in excess of $1 billion saw their debt increase to an average of $1.4 billion from a little less than $1.1 billion the previous year, perhaps due to the fact that 62% of these large organizations have bond ratings in the highest or high grade categories, compared with only 24% of all Study participants. This advantage may have enabled the largest organizations to borrow on more favorable terms.  

Investment Restrictions 

Thirty-three percent of Study respondents maintain a proxy voting policy; and of these, nearly four-fifths (77%) delegate the voting of proxies to their outside investment managers. Fifteen percent oversee proxy voting internally and another 15% retain a third party to vote their proxies (multiple answers were allowed to this question). 

Among Study participants, the ban against investing in tobacco companies is almost universal, with 94% of respondents having restrictions against investing in companies that operate in this area. Investment in companies with business related to alcohol places a distant second (40%) followed by investments related to firearms/weapons (28%), gambling (23%), pornography (22%) and abortion (21%). Just 1% of respondents have restrictions against investing in specific countries and 3% have animal welfare restrictions.

Staffing Resources 

In previous Healthcare Organizations Reports, staffing has risen modestly but fairly consistently. This trend reversed itself in this year’s Study. Overall, average staffing of the investment function fell to an average of 1.1 full time employees (FTEs) this year as compared to 1.3FTEs last year.

The decline in staffing levels may be explained in part by increasing use of boards and investment committees and outsourcing to consultants. Twenty-one percent of Study participants made increased use of their board and/or investment committee, and a similar 21% outsourced to consultants.

Participating healthcare organizations have an average of 8.2 voting members on their investment committees. Of those 8.2 members of the typical IC, an average of 3.3 are investment professionals and an average of 1.5 have experience with alternative strategies. As is true across the nonprofit world, not all IC members are trustees; for participating healthcare organizations, an average of 1.6 voting members of the IC are not trustees. 

Research Process and Methodology 

The review of the 2006 Study and the design for the 2007 Commonfund Benchmarks Study Healthcare Organizations Report took place in the spring of 2007. Field interviews with the participating institutions followed in the second and third calendar quarters of 2007. Participating institutions were interviewed by telephone, a research technique that assures greater integrity in the data gathering process. Interviewers spoke directly with the ranking business officers at participating institutions. The distribution of the 184 institutions across various sizes was designed to produce data that is statistically representative across the full sample.   

About Commonfund Institute

Commonfund Institute was founded to house the education and research activities of Commonfund and to provide the entire nonprofit community with investment information and professional development programs. Commonfund Institute is dedicated to the advancement of investment knowledge and the promotion of best practices in financial management. Commonfund Institute provides a wide variety of resources, including conferences, seminars and roundtables on topics such as endowments and treasury management; proprietary and third-party research and publications including the annual Commonfund Benchmarks Study^®and the Higher Education Price Index (HEPI); and events such as the annual Commonfund Endowment Institute and the Commonfund Prize for the best contribution to endowment investment research. Its broad range of programs and services are designed to serve financial practitioners, fiduciaries and scholars.

About Commonfund

Founded in 1971, Commonfund is devoted to enhancing the financial resources of nonprofit institutions including endowments, foundations, healthcare and service organizations through superior fund management, investment advice, and treasury operations.  Directly or through its subsidiaries, Commonfund Capital, Commonfund Realty, and Commonfund Asset Management Company, Commonfund manages approximately $43 billion for approximately 1,800 nonprofit educational institutions, foundations, healthcare and other nonprofit institutions, representing one of the largest pools of nonprofit investment funds in the world.  In response to the growing needs of nonprofit institutions, Commonfund, together with its subsidiary companion organizations, offers more than 45 different investment programs including funds for the management of short- and intermediate-term operating cash reserves. All securities are distributed through Commonfund Securities, Inc. www.commonfund.org.