As you'll see in this week's issue, not-for-profit investment managers are sticking their necks out further than they have in years. Over the past two years alone, healthcare non-profits have boosted alternative investments (including private equity real estate, venture funding and distressed debt) from 13 to 17 percent of their portfolio, while cutting back on fixed income investments (from 35 percent to 32 percent), according to a new study by non-profit financial researcher Commonfund. While this trend hasn't been absolutely consistent, generally speaking the industry has continued to move in this direction for about a decade.
So what does this mean? Maybe nothing, if your portfolio manager's a flexible type that can roll with the market. But if you have a hidebound, conservative manager in place who's dedicated largely to preserving wealth, you may have some decisions to make. The person that thrives in a high-risk, high-stakes game of buying distressed debt probably isn't the same woman or man who can steadfastly, incrementally build your assets. We're talking the difference between someone who loves T-bills and a hedge fund manager--two completely different personality types in most cases.
Do you have to take action? No. The truth is, of course, that even if your peers are taking bigger risks, you don't have to do so. But with margins falling on other lines of business, most healthcare managers have little choice but to go for bigger returns. In other words, at this point, riskier investment aren't just a "nice to have," they're a "must have" for some organizations.
That being said, you don't have to become an 80s-style risk freak. One option is to split the difference and invest in ways that don't fit either the conservative or the high-risk pattern neatly. For example, rather than betting on the performance of a private equity fund or distressed companies, you can launch new ventures that build your capital and contribute directly to your mission. That's what the University of Pittsburgh Medical Center is doing, apparently with great success, investing directly in clinical data sharing vendor dbMotion, IBM and Alcatel in deals expected to generate "billions of dollars" in returns, according to CIO Dan Drawbaugh.
You could also create a business that services your own operations--and others, too. For example, given that self-pay collections are likely to be a soft-spot for non-profit hospitals for years to come, you could create your own collections company, then provide its services to other entities.
Still, the truth is no healthcare provider's portfolio will be complete without some market-based investments, and probably, some that would never have met your guidelines in the past. That will probably mean some real changes in the look and feel of your investment management team at some point--not necessarily different players, but without a doubt, much different ways of thinking. It seems pretty clear that the old ways aren't going to cut it much longer. - Anne