Weathering tumultuous changes in the financial world, investment portfolios of many healthcare organizations look dramatically different today from how they looked 10 years ago.   


The forces that have battered the nation’s economy in the past decade have wrought tremendous, and sometimes catastrophic, changes in the value of not-for-profit healthcare organizations’ investable assets.  

In the medical research community, data collected over time provide insights into longer-term trends affecting human health. Similarly, in the investment world, we can look back on this tumultuous period and seek to identify changes that have had lasting impact.  

Findings from the 10th edition of an annual study of not-for-profit healthcare organizations offer insight into how healthcare organizations’ investment practices have evolved and compare those organizations’ experience with that of other perpetual not-for-profit investors (2012 Commonfund Benchmarks Study of Healthcare Organizations, Commonfund Institute, 2012.)

Trends in Allocations  

In this decade of extremes—from the euphoria of the mid-2000s to the debacle of the 2007-08 financial crisis—annual returns on healthcare organizations’ investable assets fluctuated widely. The lowest returns, of –21.2 percent, were posted in the crash year of 2008; the highest, of 18.8 percent, occurred as the market rebounded in 2009. Over the past decade, returns averaged 5.1 percent, a number insufficient to enable healthcare organizations’ investable asset pools to keep pace with inflation, assuming spending of 4 to 5 percent a year. In fact, based on an assumed 5 percent spending rate, not-for-profit healthcare organizations’ investable asset pools retained, on average, only around 85 percent of their 2007 peak value at the end of 2011, even after the strong recovery of 2009-10. 

In a volatile investment atmosphere such as this one, gifts can play a major role in growing an organization’s investable assets and ensuring its long-term financial health.a Too often, organizations have regarded institutional development as a tactical measure, pursuing fund-raising sporadically rather than consistently. Only now are organizations, large and small, beginning to recognize the substantial return that can come from a well-thought-out and consistently implemented development program. 

But returns are primarily the outcome of asset allocation decisions, and it is here the greatest changes have occurred. These changes can be clearly seen by reviewing, at three-year intervals over the past decade, participating healthcare organizations’ allocations of their investable assets, as seen in exhibit 1.

Exhibit 1


Several interrelated trends are apparent from these data. The trend with the widest implications is the steady move away from domestic asset classes with daily liquidity, such as domestic equities and fixed income, toward diversified and less-liquid investments, such as international equities and alternative investment strategies. International equity allocations grew by 50 percent on average—from 10 percent in 2002 to 15 percent in 2011. Allocations to alternative strategies, which accounted for just 9 percent of the average investable asset portfolio in 2002, more than doubled, to 21 percent of the portfolio in 2011.  

Conversely, fixed income allocations fell substantially, from 43 percent to 36 percent. The allocation to short-term securities/cash/other, in contrast, grew over time, particularly in the aftermath of the 2008-09 financial crisis, when the liquidity squeeze that all types of investors experienced led many to keep larger cash and near-cash allocations to support annual spending or as “dry powder”  (highly liquid marketable securities, such as treasuries) for capital calls.  

Healthcare portfolios have thus become increasingly diversified over the past decade, with particular growth in alternative strategies. This phenomenon is consistent with studies of investment practices at other types of not-for-profit organizations. In general, institutions of higher education have led diversification over the past 20 years. As shown in exhibit 2, the trend in educational endowments’ asset allocation is the same as in health care, but the former began earlier and so has developed further. 

Exhibit 2


Educational endowment allocations to both domestic equities and fixed income have been halved, while allocations to alternative strategies have grown from about one-third to well over half of total assets. Educational institutions are responding to many of the same forces spurring healthcare organizations to shift their allocations.  

The important difference is that healthcare organizations are strongly influenced by bond rating agencies, whose preference for fixed-income investments has slowed the sector’s adoption of alternative investment strategies. These higher fixed-income allocations have created a drag on performance without providing adequate protection in the financial crisis; thus, not surprisingly, fixed-income allocations have been reduced over time. This trend should continue as healthcare organizations seek higher returns from their investable asset pools to offset declining payments from private and governmental payers.  

Investment in Sustainable Health

These asset allocation shifts are the result of policy decisions implemented over several years. At most organizations, sudden shifts in asset allocation are not the rule; instead, investment policy statements and policy portfolio targets evolve together, reflecting the considered opinions of the fiduciaries responsible for guiding them. 

Every board and investment committee is charged with making thoughtful decisions based on its organization’s mission, strategy, philosophy, service objectives, and financial resources. Over the past decade, healthcare organizations have increasingly adopted the endowment model, a highly diversified portfolio with a higher-than-average tolerance for illiquidity, pioneered by colleges and universities. Fundamental to this model are the following premises:

  • Equities outperform fixed-income investments over the long term. 
  • A well-diversified portfolio will be less volatile and offer more return potential over time. 
  • Less-liquid alternative strategies should reward investors with higher returns to compensate for their relative illiquidity—if the fund’s manager can consistently generate top-quartile results in these talent-based businesses.  

As market and regulatory forces continue to squeeze healthcare organizations’ revenues, their reliance on transfers from the investable asset pool appears likely to increase. The imperative to maintain the purchasing power of the pool after spending, costs, and inflation means this model of investing should continue to present the most attractive, realistic set of long-term opportunities for perpetual investors—including not-for-profit healthcare organizations.  

William F. Jarvis is managing director, Commonfund Institute, Wilton, Conn. ( 


a. Griswold, J.S., and Jarvis, W.F., Essential Not Optional: A Strategic Approach to Fund-Raising for Endowments, August 2012.


Publication Date: Tuesday, January 01, 2013

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead