Healthcare groups post flat investment returns

Investment returns for 86 nonprofit healthcare organizations were flat in fiscal 2011 following net gains of 10.9 percent in fiscal 2010 and 18.8 percent in fiscal 2009, a new study says.

For those same organizations, average annual net return on investable assets totaled 9.6 percent for the trailing three years, and 1.8 percent for the trailing five years, says the 2012 Commonfund Benchmarks Study of Healthcare Organizations.

Defined benefit plan assets for participating organizations performed better, averaging returns of 1.3 percent, although that also was significantly lower than their average net return of 12.3 percent in fiscal 2010.

Three-year returns for defined benefit plans averaged 11 percent, and five-year returns averaged 2.2 percent.

Participating organizations represented $99.8 billion in investable assets ad $42.4 billion in defined benefit plans as of Dec. 31, 2011.

Healthcare organizations also made a big shift to alternative investment strategies in their asset allocation, increasing those investments to an average of 21 percent of assets in fiscal 2011 from 17 percent in fiscal 2010.

“Healthcare organizations’ higher allocation to alternatives is an ongoing trend that mirrors what we have found in recent annual studies of colleges and universities, foundations and operating charities,” John S. Griswold, executive director of Commonfund Institute, says in a statement.

Among all asset classes, fixed income provided the highest return, an average of 5.4 percent, followed by alternative strategies, 3.9 percent; short-term securities/cash, 0.2 percent; domestic equities, a loss of 0.2 percent; and international equities, a loss of 10.9 percent.

Todd Cohen

Fundraising emerging as ‘strategic’ asset

To survive and thrive, nonprofits need to move beyond treating fundraising as a “tactical” resource and treat it as a “strategic” asset that is core to their operations and organization, a new white paper says.

“With market returns uncertain and spending restraint difficult, the moderate but measurable increase in donations in the last year invites institutions to consider elevating fundraising to a more strategic position within the organizations,” says Essential Not Optional: A Strategic Approach to Fund-raising for Endowments, a white paper from the Commonfund Institute.

“No longer optional, an effective fundraising program, consistently implemented, can become a central pillar of support for the institution,” says the paper, written by John S. Griswold, executive director of the Commonfund Institute, and Bill Jarvis, its managing  director.

After their collapse four years ago, the capital markets recovered slightly but “have not shown clear direction,” and many investors doubt they are likely soon to “resume the double-digit pace that characterized the pre-crisis period,” the paper says.

And while overall giving has shown “subdued growth,” it says, the current period is one of the most favorable ever for endowment fundraising.

But successful fundraising is “invariably the fruit of a building process that takes time, resources and institutional commitment,” it says.

Fundraising campaigns have become “permanent” efforts, “always running in the background, with continuous cultivation of major gift prospects and a prioritized list of defined projects at the ready for negotiation with donors,” the paper says.

And nonprofits have moved to a strategic or “core” fundraising model that “focused on providing endowed support for the core mission of the institution and for a specific number of areas that have the potential to make a major difference in the institution’s future.”

Key to permanent campaigns is the idea that the “relationship between the donor and the institution has also changed and become more strategic,” the paper says, citing a fundraising professional who says asking for money “just alienates today’s donors.”

Fundraisers should be asking donors “how they want to change the world,” the fundraiser says.

And while the “intersection between donor interests and institutional imperatives may not always be obvious,” the paper says, “the strongest relationships seem to be forged from these conversations — or negotiations — that compel the parties to find common ground.”

Donors themselves are changing, the paper says.

They tend to be self-made, “relatively skeptical of broad institutional claims,” “quite specific about their likes and dislikes,” and wanting to “compare the performance of the institution’s existing endowment with their own wealth-creation capabilities when deciding to make a gift.”

Donors in short connect “development success and institutional competence in financial management,” the paper says.

“Institutions with strong missions but weak financial management will receive annual gifts,” it says, “while those with strong missions and strong financial management will be considered for endowed gifts.”

Corresponding to the increased focus on donor interests has been a shortage of unrestricted endowment gifts, the papers says, with the emphasis on new programs and buildings tending to “overshadow the question of how ongoing expenses are to be met.”

That issue has become a “source of anxiety: for institutional leaders, particularly at institutions that lack unrestricted endowment and cannot accumulate free cash flow” through operating surpluses or other sources of revenue, the paper says.

More wealth is being concentrated among fewer donors, it says, with 2 percent of donors at some leading institutions contributing 98 percent of funds, compared to the historical pattern typical at many institutions that saw 20 percent of donors contributing 80 percent of the funds raised.

“This lopsided ration means that, while a broad base of donors is desirable for many reasons,” the paper says, “development efforts are increasingly focused on identifying and grooming those doors who have the capacity to make a significant contribution.”

So building “permanent professional development departments,” which “rarely existed, even at large institutions,” the paper says, has become “an investment, not an expense.”

In addition to “grooming” donors for contributions to the permanent campaign, it says, development staff also “seek to understand the receptivity of donors to planned giving opportunities and to assess the likelihood that they will leave bequests.”

Todd Cohen

Charities post investment losses after two strong years

Investment returns for foundations and operating charities fell slightly in fiscal 2011 after posting double-digit growth each of the previous two years, two new studies say.

Grantmaking and gifts to charities were mixed, say the 2012 Commonfund Benchmark studies of foundations and of operating charities.

The 179 independent/private and community foundations, with a combined total of $100.4 billion in assets, posted an average total net loss in fiscal 2011 of 0.9 percent, net of fees, compared to gains of 12.5 percent in fiscal 2010 and 20.9 percent in fiscal 2009.

The 68 operating charities surveyed, with a combined $24.2 billion in assets, posted an average net loss of 1.8 percent on investment funds, compared to  gains of 11.6 percent in fsical  2010 and 21.5 percent in fiscal 2009.

The 2011 results marked the first time since fiscal 2008 that foundations and operating charities reported negative returns.

“2011 was a frustrating year for foundations and operating charities,” John S. Griswold, executive director of the Commonfund Institute, which sponsors the studies, says in a statement. “On top of the negative investment returns, the addition of inflation and investment-management costs means that these institutions fell a little farther behind financially, even before spending for mission support.”

Participating foundations posted an average three-year return of 10.5 percent, compared to a loss of 0.3 percent in 2010, reflecting the fact that the average loss of 26.5 percent for fiscal 2008, the year the capital markets collapsed, no longer was part of the calculation.

But the five-year net return fell to 1.5 percent from 4.2 percent a year ago, while the 10-year average annual return totaled 5.2 percent, down only slightly from 5.1 percent.

For operating charities, three-year returns averaged 10 percent last year, up from 0.1 percent a year earlier, while five-year returns averaged 1.8 percent, down from 4.7 percent last year, and 10-year returns averaged 5.5 percent, up from 4.9 percent last year.

Fifty percent of foundations surveyed reported higher spending in dollars in fiscal 2011, up from 38 percent in 2010, with just 25 percent reporting spending fewer dollars, down from 43 percent in fiscal 2010, and 13 percent reporting no change.

Among operating charities, 30 percent reported spending more dollars in 2011, up from 25 percent in 2010, while 35 percent reported spending fewer dollars, down from 49 percent in 2010, and 22 percent reporting no change, up from 19 percent in 2010.

Twenty-six percent of operating charities surveyed reported an increase in gifts received in 2011, up from 10 percent that reported an increase in 2010, while just 12 percent reported a decline in 2011, down from 17 percent in 2010, with 49 percent reporting no change.

Independent/private foundations reported average net investment losses of 0.7 percent, while community foundations reported average net losses of 1.4 percent.

The highest return for foundations, 5.7 percent, came from fixed-income assets, while the lowest, a loss of 12.2 percent, came from international equities.

The average annual effective spending rate for participating foundations was 5.5 percent, down from 5.8 percent in 2010, while the average debt load fell to $47.3 million from $67.4 million.

Among operating charities, cultural and religious organiztions averaged a loss of 1.8 percent, while social-service organizations averaged a loss of 1.9 percent.

Fixed-income assets produced the highest return for operating charities, an average gain of 5.2 percent, while the lowest, a loss of 10.1 percent, came from international equities.

Todd Cohen