Winter jacket: Considerations for non-profit hospital systems to strengthen their portfolio amid economic uncertainty and operational pressures

Executive summary:

  • Macroeconomic uncertainty remains elevated. We believe a recession in 2024 is more likely than not.
  • Non-profit hospital systems have faced significant operational pressures, and may continue to experience challenges in the near-term.

The bottom line: By partnering with an organization like Russell Investments that has extensive experience in working with non-profit hospital systems, your organization can be better equipped to build a resilient portfolio while navigating operational pressures.


Howling winds, frigid air, and a seemingly endless amount of snow. Winter storms can disrupt the lives of millions of commuters. In these arduous times, it’s more important than ever to have a reliable winter jacket to protect you.

Similarly, amid the elevated economic uncertainty and significant operational pressures that face non-profit hospital systems, we believe that it’s important to ensure that your investment portfolio is sufficiently resilient.

In this article, we discuss our broad macroeconomic views as well as the operational pressures that non-profit hospital systems like yours might have experienced. Then, we discuss three asset classes that may be attractive and help enhance the robustness of your investment portfolio.

A vertigo-inducing economy: the dizzying mix of opposing economic signals

2023 has been a dizzying year for investors. As of early December 2023, the benchmark S&P 500 index was up roughly 20% year-to-date, a welcome reprieve from the double-digit declines experienced in 2022. And economic growth has continued to defy expectations. Data from the U.S. Bureau of Economic Analysis suggests that the U.S. economy grew at a whopping 5.2% annualized rate in Q3 2023, significantly above the typical trend GDP growth of 1.8%

Meanwhile, the U.S. Federal Reserve (Fed) has made significant strides in its inflation fight. Core personal consumption expenditure (PCE) inflation rates have moderated to 3.5% year-over-year, a noticeable improvement from the 5.6% year-over-year peak in core inflation rates in 2022. That being said, core inflation rates are still nearly double the Fed’s 2% inflation target.

On the other hand, there are still signs pointing to a potential economic storm ahead. Bank lending standards are extremely tight. The manufacturing sector has recorded 13 months of contractionary activity. And temporary help employment—a measure that tends to lead declines in the broader labor market—has been on a generally downward path over the last year.

As we explained in our 2024 Global Market Outlook, we believe that a mild-to-moderate U.S. recession is the most likely outcome in 2024, although we do caution that economic uncertainty remains elevated, and it is still potentially possible (even if unlikely) for the economy to achieve a soft landing.

Non-profit hospital systems have been under pressure

While the recent market volatility has been a challenge for investors in general, non-profit hospital systems also have to contend with significant operational pressures. For instance, the tightness in the post-COVID labor market has resulted in significant increases in salary expenses. The Employment Cost Index for Q3 2023 showed that compensation expenses for civilian hospital workers increased by roughly 6% year-over-year, much higher than the longer-term average growth rate. While there are tentative signs that wage pressures might have peaked, the impact has likely already been felt.

In addition, many non-profit hospital systems have had to deal with the sting of higher interest rates. Elevated borrowing costs means that some non-profit hospital systems may have to defer long-term capital expenditures, hurting their ability to grow.

And with a potential recession in 2024, operational headwinds may continue in the near-term. An economic downturn could result in a decline in revenues, as patients are forced to postpone the elective surgeries that are typically key cash flow generators for hospitals. Meanwhile, even if the Fed cuts rate, overall borrowing costs could still remain elevated as credit spreads widen.

The difficult macroeconomic and operating environment means it’s more important than ever to insulate your investment portfolio with a thick winter jacket. Below we outline some potential opportunities that you may wish to consider:

The thick outer shell: Bonds

Winter jackets often rely on a thick outer shell. Likewise, we think that fixed income investments can be a primary defensive lever to include in your organization’s portfolio. We know that many non-profit hospital systems tend to invest their capital conservatively and may already have a sizeable allocation to fixed income investments. And we know that the experience might have been somewhat painful. While bond yields have come down from their recent peaks, they are still well above the pandemic lows, creating losses for some bond investors.

However, that headwind might soon turn into a tailwind. Markets have now largely abandoned the higher-for-longer narrative, and instead expect the Fed to begin rate cuts in 2024, with interest rates ultimately bottoming out at around 3.3% in 2026. But we think the Fed might cut even more.

If a recession materializes, history suggests the Fed may need to cut interest rates by a cumulative 400 to 500 basis points (bps). That could mean interest rates might eventually end up back near zero. And even if the Fed pulls off an unlikely soft landing, where inflation miraculously returns to target with minimal damage to economic growth, the federal funds rate is more likely to eventually settle at the Fed’s estimated neutral policy rate of around 2.5%, rather than the 3.3% currently priced in by the markets.

In addition, with the current yield on U.S. 10-year bonds still above 4%, we think bonds can provide a less volatile way for your investment portfolio to meet its hurdle rate requirement. Within bonds, we would prefer the defensiveness of U.S. Treasuries over corporate bonds, as credit spreads may have more room to widen if a recession materializes.

The advanced weatherproofing inner layer: Private credit

In addition to relying on the sheer thickness of insulative materials, winter jacket manufacturers often tout the advantages of advanced weatherproofing technology found in the inner layers of their winter jackets. In many ways, this is similar to the appeal of private credit.

As an alternative asset class, private credit can enhance portfolio diversification, while simultaneously increasing the expected return of the portfolio. Private credit investments can often provide better yields than public credit opportunities. For non-profit hospital systems who are finding it challenging to meet higher hurdle rates, the inclusion of private credit in a portfolio can be a worthwhile choice.

Of course, private credit investing is not without its challenges. Some have argued that too many investors have chased into private credit recently, which could make valuations less exciting. Other critics argue that private credit will ‘catch down’ to the asset value declines seen in public credit.

From our perspective at Russell Investments, these challenges should not deter investors from pursuing private credit opportunities outright. Rather, we think that these challenges underscore the importance of being selective of how you allocate to private credit. Our fund-of-funds approach and extensive research capabilities can help you seek out the best-in-class opportunities within private credit.

Don’t overlook the pockets: Listed real assets

It’s so easy to overlook the pockets in a winter jacket. But they too play a key role—allowing you to store accessories like mittens that can provide even more warmth. Similarly, we think investors shouldn’t overlook listed real assets. These asset classes provide the diversification benefits typically associated with alternative assets, but also feature equity-like liquidity. Amid the challenging operating environment that many non-profit hospital systems have found themselves in, liquidity in the investment portfolio can be paramount.

As of late November 2023, both listed infrastructure and listed real estate investments have underperformed the broader equity market. Listed infrastructure has been weighed down in part by receding inflationary pressures, and a decreased need for an inflation ‘hedge’. Meanwhile, listed real estate has been hampered by sensitivity to rising interest rates. While the relative year-to-date underperformance of listed real assets may have hurt investors who were already allocated to these asset classes, it also means that the current valuations may be attractive.

Listed real estate investments have been scoring as somewhat cheap in our valuation framework for more than a year, while listed infrastructure investments have become somewhat cheap in the recent few months. While these valuations aren’t yet at extremes, we still think that this could be an attractive entry point for those non-profit hospital systems that can take a longer-term horizon to their investment decision making.


It’s hard to change the path of a snowstorm. But with an effective winter jacket, you can be better prepared to weather the storm. Of course, just as people need winter jackets that fit, so too can the optimal portfolio vary depending on each organization’s circumstances and investment objectives. By partnering with a trusted organization like Russell Investments, we can help you evaluate the potential opportunities, and design the best ‘winter jacket’ to shield your investment portfolio.