Nonprofit healthcare organizations need to continue diversifying their portfolios to avoid a third consecutive dip in annual returns, according to the Commonfund Benchmarks Study Healthcare Report 2006. Healthcare organizations' average total returns dropped to 6.3% for the year ending June 30, from 8.2% the previous year and 14.1% in 2004. Sluggish markets largely account for the dwindling returns, making it even more important to move out of equity. "Nonprofit healthcare organizations are diversifying into alternatives more and more but they still have a ways to go," said John Griswold, executive director of the Commonfund Institute. "They are not as diversified as colleges and universities and not as protected from downturns in the market." On average, the 202 healthcare organizations that participated in the study cut their domestic equity allocations to 30% from 34% during the year ended June 30. Fixed income was pared back to 34% from 41%. Meanwhile, international equities inched up to 12% from 10%. Healthcare organizations increased their alternatives exposures to 15% from 10%; within that their allocation to hedge funds dropped to 58% of total alternative investments from 73% the previous year.

Griswold noted that healthcare organizations have traditionally been more conservative than other nonprofits in their long-term investment approach. "They have a lot of short-term costs that they have to worry about, such as providing charity care, purchasing expensive equipment and hiring a large number of staff members," he said. Many also lack the time and staff to properly conduct due diligence on alternative asset classes. "They would be great candidates for outsourcing their investments," he said. Market downturns burden hospitals more than anyone else in the nonprofit sector due to the enormous costs they face.