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Commonfund Institute |
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U.S. NONPROFIT HEALTHCARE ORGANIZATIONS REPORT AVERAGE INVESTMENT RETURNS SLIPPED TO 8.0% IN FISCAL YEAR 2007
2008 Commonfund Benchmarks Study of Healthcare Organizations Shows Increased Allocation to Alternative Investment Strategies
WILTON, CT., September 15, 2008 – The average annual total return on investable assets for FY2007 for 179 nonprofit healthcare organizations participating in the 2008 Commonfund Benchmarks Study of Healthcare Organizations was 8.0 percent (net of fees), down significantly from 10.6 percent for FY2006, but up from 6.3 percent for FY 2005.
The lower year-over-year return can be attributed largely to weaker investment performance in domestic equities and international equities, both of which saw returns decline by half compared with FY2006. For participating healthcare organizations, domestic equities returned 6.3 percent in FY2007 versus 13.9 percent in FY2006, while international equities returned 12.1 percent compared with the previous year’s 24.7 percent return.
The year’s highest returns were to be found within the broad alternative strategies allocation. Overall, alternative strategies returned an average of 12.8 percent, up from 11.7 percent in FY2006. Within alternative strategies, energy and natural resources (oil, gas, timber, commodities and managed futures) led with an average return of 21.5 percent, strongly ahead of FY2006’s average return of 7.9 percent. Distressed debt followed closely, delivering an average return of 19.2 percent, well ahead of 9.1 percent a year earlier. Private equity (including LBOs, mezzanine debt, M&A funds and international private equity) posted an average gain of 17.7 percent, comfortably ahead of 11.3 percent in the previous year’s report. Marketable alternative strategies (which include hedge funds and absolute return funds) returned an average of 11.8 percent compared with 10.9 percent in the FY2006 Study. Venture capital returns nearly doubled – to an average of 10.1 percent from 5.3 percent – while private equity real estate declined to an average return of 13.9 percent from 17.1 percent in FY2006.
The average fixed income return rose to 6.5 percent from 4.7 percent. With short-term interest rates falling dramatically in the second half of the year, the return on short-term securities and cash fell to an average of 5.1 percent from 8.2 percent in FY2006.
Despite FY2007’s lower return, average three-year returns for Study participants as a whole showed a modest improvement to 9.0 percent from 8.8 percent in last year’s Study. An even more noticeable upward move was apparent in average five-year returns, which rose to 11.1 percent from 7.3 percent a year ago. The higher five-year average is the result of dropping FY2002’s -4.9 percent return from the calculation.
Perhaps the most noteworthy finding in this year’s Study was a marked change in participating healthcare organizations’ asset allocation, in which the average share of portfolios committed to alternative strategies rose to 17 percent from 13 percent last year.
“This is a significant move in and of itself, but it is magnified in importance when one realizes that in the very first Healthcare Report – published in 2003 for FY2002 – the average alternatives allocation was just 9 percent and that it actually declined to 8 percent in the following year’s Study,” said John S. Griswold, Executive Director of Commonfund Institute, which sponsors the study. “Thus, while the trend line has not been straight up it is clear that healthcare organizations have been making a greater strategic commitment to alternative strategies over the course of the decade.”
While their alternative strategies allocation grew by four percentage points, healthcare organizations’ allocation to fixed income fell to 32 percent of assets from 35 percent a year ago. The allocation to short-term securities and cash declined to 5 percent from 7 percent year over year. Aside from alternatives, the only other asset class that showed growth year over year was international equity, which rose to 15 percent from 14 percent in FY2006. The domestic equity allocation was level year over year at 31 percent.
Within alternative strategies, the allocation to marketable alternatives declined while allocations to private equity real estate, energy and natural resources, and private equity increased. Allocations to venture capital and distressed debt remained low and relatively stable.
The Study universe includes total investable assets of $135 billion and defined benefit (DB) plan assets of $55.7 billion for the 179 participating organizations. Average investable assets were $754 million and average DB plan assets were $501 million for each institution.
Benchmarks Leaders
For the second straight year, the Commonfund Benchmarks Study Healthcare Organizations Report featured an analysis of the top decile and top quartile performers in the overall Study group of 179 organizations. The objective of this analysis is to allow healthcare organizations to gain insights into the practices and policies of their “best of breed” peers.
The Benchmarks Leaders analysis shows that asset size is a factor in investment success, but not a decisive one. Investable assets for the top decile group averaged $972 million, higher than the average $754 million for all Study participants. However, average investable assets for the top quartile, at $741 million, were actually slightly lower than the average for all participants.
The top decile of participating healthcare organizations realized an average return on investable assets of 13.5 percent, while the average for the top quartile was 11.5 percent. Both figures are well ahead of the 8.0 average return reported by all Study participants.
The average three-year return was 12.3 percent for the top decile and 11.0 percent for the top quartile. By comparison, all Study participants reported an average three-year return of 9.0 percent. For the trailing five-year period, the top decile reported average annual returns of 13.5 percent, while the top quartile was not far behind at an average of 12.8 percent. The average annual five-year return for all Study participants was 11.1 percent.
Asset allocation appears to account for most of the Benchmark Leaders’ better performance. In particular, the differential may be traced to difference in the allocations to alternative strategies and fixed income. In the former, the top decile reported an average allocation of 33 percent –nearly double that of the average 17 percent for the total Study population – and the top quartile reported an average allocation of 28 percent. As for fixed income, top decile and top quartile organizations each averaged an allocation of just 19 percent versus 32 percent for all Study participants.
Other differences were much less pronounced. Top decile performers reported an average domestic equity allocation of 26 percent versus 31 percent for all Study participants. Top quartile performers actually had a slightly higher than average domestic equity allocation, at 32 percent. Benchmarks Leaders reported an average international equities allocation of 18 percent versus 15 percent for the total Study population. Finally, Benchmarks Leaders had moderately smaller allocations to short-term securities and cash.
Summary of Additional Study Findings
Budgets and Operating Margins
Among Study participants, operating budgets in FY2007 averaged $921 million and capital
budgets averaged $149 million. Both have increased over the past year; in FY2006 operating budgets averaged $882 million while capital budgets averaged $99 million.
The median operating margin for all participants in the 2008 Study was 3.6 percent,
ranging from a high of 4.2 among organizations with investable assets over $1 billion to a low of 1.4 percent among organizations with assets of $51 to $100 million.
(Commonfund Benchmarks Studies generally report average data. The median is reported for operating margin because the average was skewed by extremely negative margins among a few smaller healthcare organizations.)
Debt
For the second straight year, participating healthcare organizations reported a higher debt level. Overall, debt rose to an average of $580 million from $509 million in FY2006 and $395 million in FY2005 (the latter representing a decline from $413 million in FY2004).
Debt as percentage of investable assets averaged 92 percent. However, median debt as a percentage of investable assets is significantly lower at 76 percent. Looking ahead, 35 percent of Study participants plan to significantly increase debt in the next two years. This is moderately lower than last year’s 39 percent.
Investment Restrictions
Thirty-four percent of Study participants maintain a proxy voting policy, virtually unchanged from 33 percent in last year’s Study. Of those that maintain such a policy, 73 percent delegate the voting of proxies to their outside investment managers, a modest decline compared with last year’s 77 percent. Seventeen percent oversee proxy voting internally compared with 15 percent a year ago, while 20 percent retain a third party to vote their proxies, up from 15 percent last year (multiple responses were allowed).
Among respondents reporting that they have social investing criteria for their portfolios, an average of 88 percent of the portfolio is screened.
Resources
Overall, staffing of the investment function returned to its approximate long-term average of 1.3 full time employees (FTEs) after slipping to an average of 1.1 FTEs in last year’s Study. Staffing levels vary widely across the four size cohorts in the Study. Organizations with over $1 billion in investable assets increased their average number of FTEs to 2.5 from 2.2 a year ago. Organizations with assets of $501 million to $1 billion increased their average staffing to 1.3 FTEs from 1.1 a year ago. Organizations with assets between $101 and $500 million averaged 0.7 FTEs, while organizations with assets between $51 and $100 million averaged 0.4 FTEs – both virtually unchanged year over year.
Research Process and Methodology
The review of the 2007 Study and the design for the 2008 Commonfund Benchmarks Study Healthcare Organizations Report took place in the late winter and spring of 2008. Field interviews with the participating institutions followed in the second and third calendar quarters of 2008.
Participating institutions were interviewed by telephone, a research technique that assures greater integrity in the data gathering process. Interviewers spoke directly with the designated investment contact at participating institutions. The distribution of the 179 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 educational and other nonprofit institutions 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 $42 billion for approximately 1,800 educational institutions, foundations, healthcare and other nonprofit organizations, representing one of the largest pools of educational endowment and operating 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.
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