Non-profit health care organizations reported strong returns for the 2017 calendar year, but their long-term results lag spending needs, according to Commonfund Institute data released Tuesday.
A total of 56 organizations reported an average return of 13.2 percent net-of-fees on investable assets, which Commonfund defined as “endowment/foundation funds, funded depreciation, working capital and other separately treated assets.”
For 2016, the group returned 6.2 percent on average, the data showed.
“They had an excellent year last year,” said Cathleen Rittereiser, executive director of Commonfund Institute, by phone to Institutional Investor.
The 56 surveyed funds managed $2.1 billion on average at year-end, the data showed, with a median pool of investable assets at just shy of a $1 billion.
One standout in this institutional category has been Hartford Healthcare. The $3.2 billion foundation that supports a major Connecticut hospital network returned 12 percent net-of-fees for the year ending June 30, 2018, its chief investment officer, David Holmgren, told Institutional Investor in August. Hartford added 420 basis points above the median fiscal year return for endowments and foundations, placing it in the top 2 percentile of that broader peer group.
But a stellar 12 months only goes so far for non-profit health care organizations.
“We also think it’s important to not just focus on the one-year returns,” said Rittereiser. “Trailing returns are improving, but still they are behind the basic five percent return that institutions need over time.”
Health funds tracked by Commonfund averaged 5.9 percent returns for the trailing three-year period ending December 30, 2017; 6.9 percent for the trailing five-year period; and 4.6 percent for the trailing ten-year period.
The strong 2017 results boosted these multi-year averages from those in 2016, which were 3.1 percent for the trailing three year period, 6.5 percent over five, and 4.2 percent over ten, according to the report.
The Commonfund Institute’s standard benchmark for nonprofit institutions is the consumer price index plus five percent, according to Rittereiser. “You have to earn enough to meet your spend,” she said. “That’s been a historical average. You want to meet that to outpace inflation.”
Health care nonprofits fell short for the trailing ten-year period ending in 2017, Rittereiser pointed out.
“We have observed that health care organizations tend to have a higher allocation to fixed income, but not so much to alternatives, which we think can add alpha over time,” Rittereiser said.
In 2017, investors kept their asset allocations nearly the same as the year prior, according to the study. The average portion in U.S. equities increased two percentage points to 21 percent, Commonfund data showed, and in non-U.S. equities by one percentage point.
This small average increase in public equity exposure counteracted a one percentage point decrease year-over-year in allocations to alternative strategies, and a two percentage point drop for cash and other short-term investments.
Since 2013, the fixed income has grown from 25 percent of a typical portfolio to 31 percent, the report stated.
Bond rating agencies compel these non-profit health care funds to remain fairly liquid, which is why these allocations remain high, according to Commonfund Institute managing director George Suttles.