The 2021 List Issue, Part 2: The re-evaluation list for non-profits and healthcare

Editor’s note: This is part 2 in a four-part series on 2021 investment insights. Part 1 can be found here.


As the sun sets on one of the most challenging years in memory, many healthcare systems and other types of non-profits find themselves in starkly different financial situations than they were at the start of the year. From overflowing intensive-care units to empty university lecture halls, the coronavirus pandemic and the accompanying lockdown measures have flipped the sector on its side, gutting revenue, increasing expenses for some and leaving many in dire financial straits. Amid this backdrop, fiduciaries are facing increasingly difficult decisions when it comes to managing their investment programs to best support their financial plans. With this in mind, we’ve compiled a list of five key issues that we believe healthcare, hospital and non-profit fiduciaries should consider as the world awaits a more promising 2021.

1. Have the economic challenges of the COVID-19 pandemic caused a significant change in your organisation’s financial situation? If so, have you evaluated whether or not changes to your investment strategy are required?

The COVID-19 crisis has been a double-whammy for the financial well-being of hospitals and healthcare systems. Rising hospitalisations due to the virus, coupled with the increasing costs for basic supplies of personal protective equipment (PPE) and other items, have drastically increased operating expenses. At the same time, government-mandated restrictions have forced many to cancel elective procedures periodically throughout the year, cutting off a key source of revenue. In a nutshell, the worst of both worlds has occurred: expenses have skyrocketed while revenue has plummeted.

A similar trend has played out among other types of non-profits. For example, the transition to online learning in many universities has led to notable drops in enrolement - triggering a marked shortfall in revenue. The situation has been even worse for venues such as museums, which have largely remain shuttered since the spring. Likewise, community-based charitable organisations are seeing an increasing demand to fund support services as unemployment levels remain high. 

These types of challenges on the operating side of the house don’t necessarily mean change is also required on the investment side. However, if the change in your financial situation has also led to a change in your risk tolerance, spending policy or required liquidity, we recommend undertaking a thorough review of your investment strategy. The reasons are many. The events of 2020, for instance, may have led to a decrease in risk tolerance across your organisation, which means your asset-allocation strategy may need to be adjusted to offer more protection in down markets. Or, perhaps your investment program may now be supporting a greater percentage of your operating budget. If so, an assessment of liquidity may be warranted. 

For healthcare systems, it may be worth exploring other income-generating strategies - in particular, looking for ways to obtain income from your investments to compensate for the loss in operating income. This is an especially important point to consider in light of 2020’s strong equity-market recovery - as of this writing, the S&P 500® Index is up 13% on the year.

Can you fix the problems on the operating side of the house by tapping into the performance on the investment side? In some cases, the answer may be no. Perhaps your organisation can manage through these short-term financial challenges while leaving your investment strategy in place. Maybe cashflow needs can be met by a fundraising drive. Or maybe your operating budget is solid enough in the short-term. Ultimately, whether or not a change in investment strategy is needed will vary by organisation - but we believe the best way to determine the need for change is through a holistic assessment of your organisation’s current financial health and an evaluation of how well your investment program supports your financial plan.

2. Interest rates are expected to remain low for the foreseeable future. Have you reviewed updated capital market projections for your investment strategy? Does your asset allocation still support your long-term return goals?

The COVID-19 crisis has led to some significant changes in capital market expectations going forward. As the world digs out of the steepest recession in over 80 years, the U.S. Federal Reserve (the Fed) has made it abundantly clear that low interest rates are here to stay. This is likely to have noteworthy ramifications for the bond market, with yields remaining depressed for some time. What does this mean for your organisation’s asset allocation strategy - does the asset allocation you have in place today still meet return expectations? Or is it time to look beyond bonds for higher returns?

We believe it may be prudent for fiduciaries to consider adding exposure to alternative asset classes, such as private equity, debt, real estate or infrastructure. With lower return expectations from public markets, organisations that are able to accept the illiquidity risk associated with private markets may benefit from the attractive long-term return characteristics of these asset classes. However, the degree to which an organisation can take on such risk will vary across the board. These type of exposures aren’t an option for all, but for those organisations that can withstand the illiquidity, an increased allocation to alternative investments could be the right step to take.

3. Re-evaluation of spending policies

If possible, we believe that fiduciaries should also partake in a thorough re-assessment of their organisation’s spending policies.

We’ve seen some organisations already doing this, generally reducing their spending budgets below the traditional 5%. This can be an especially prudent step to take for organisations that were forced to overspend in 2020. However, the economic crisis triggered by COVID-19 also makes this impractical for many organisations - such as community foundations, whose very purpose is to assist those impacted by economic hardships.

For these organisations, a change in investing strategy may very well be needed to help ensure the portfolio generates a rate of return that supports a higher level of spending.  Specifically, greater risks may need to be taken on the investment side of the house in order to generate higher returns.

4. Are you really aware of the drivers of risk in your portfolio?

We believe the extreme market volatility of 2020 demonstrates all too well the value of knowing the real-time exposures of your portfolio - down to the security level. While many non-profit fiduciaries may have a high-level view of their portfolio makeup - such as a 60% allocation to equities - how many organisations can say what percentage of that comprises growth stocks versus value stocks? Or what portion is allocated to domestic equities versus global equities? Or what about credit exposure - how much is in Treasuries versus corporate credit?

These are important questions to know heading into 2021, especially given the recent rotation away from growth stocks and into value stocks - a trend which we expect to continue next year. Not only does a dynamically managed portfolio allow for the opportunity to exploit volatility in the short-term, but it also provides detailed, real-time knowledge of your exposures to ensure your risk appetite isn’t being exceeded.

This is especially relevant when it comes to the increasing concentration seen in major equity benchmarks, such as the S&P 500. Today, five companies comprise 26% of the index’s market capitalisation - a startingly high concentration that could become especially problematic for investors that are over exposed to growth stocks in the event of a tech-fuelled selloff. The ability to work with an investment solutions provider that offers a holistic, transparent view into the 24/7 happenings in your portfolio - and can make adjustments on the fly during periods of volatility - may very well be key to managing risks like this. 

5. ESG: Has your investment committee discussed beliefs regarding ESG? Is committee education needed?

The final issue we believe should be top-of-mind for fiduciaries heading into 2021 is ESG (environmental, social and governance) investing. Throughout 2020, we’ve observed a greater embrace of ESG investing among non-profits in particular, and we think this trend will continue to grow.

With this in mind, we believe it’s a good idea to provide further education on ESG investing to investment committee members and other key stakeholders. Specifically, education on the differences between ESG and SRI, as well as education on how to start down the path toward integrating ESG into your investment program. While ESG issues may not appear to be financial risk factors at first glance, they can impact security prices regardless. ESG investing understands this. For instance, a company with a poor governance structure is at a higher risk of subpar financial performance - and such performance would detrimentally impact the value of the company’s security prices. There are a range of ways to integrate ESG into an investment program and ensure it is properly documented in the IPS. The first step is education and a discussion of goals and objectives. 

With ESG-themed investing, there may be no need to sacrifice financial performance. As we’ve written about extensively, we believe organisations can have their cake and eat it, too. This is a key difference worth illustrating to those on your investment committee. ESG investing can range from investing in a low-carbon equity fund or a green bond fund (i.e., the environmental element), or swaying a company to improve its diversity, equity and inclusion efforts through proxy voting and engagement (the social and governance elements). Proxy voting in particular can lead to significant changes in how a corporation operates. In recent years, it’s become a very powerful medium for shareholders to influence corporate actions.

The bottom line

The difficulties confronting healthcare systems and other non-profits aren’t going away with the turn of the calendar. Revenue shortfalls and spending woes are likely to persist well into 2021, if not longer, as organisations struggle to regain their footing amid the ongoing health crisis. Operational risks and investment risks must be carefully weighed going forward. Amid this backdrop, we believe a thorough exploration of the issues above can best guide organisations through today’s turbulent times. Let us know how we can help.