Alternative Allocations for US Healthcare System and Hospital Investors Continued to Climb as Dispersion Rises

Annual Goldman Sachs Asset Management Healthcare Survey Shows Investment Offices More Concerned with Operational Pressures Than Macro Issues, Yet 62% Expect 2024 Recession.

With uncertainty high, investment allocators for leading US healthcare systems and hospitals show substantial dispersion in their views on macro, markets, and asset allocation approaches. Many continued to increase allocations to alternatives, and interest in cash and fixed income has increased with higher-for-longer interest rates.

Concerns over inflation and recession risks have eased, partially replaced by geopolitical and fiscal policy fears. Micro concerns – including liquidity, resourcing and technology – are now top of mind.

These are some of the key findings of the newly released Goldman Sachs Asset Management sixth annual report, “Healthcare Investment Diagnostic 2023: Turning the Corner,” offering detailed observations and insights from leading US healthcare systems and hospitals.

“Although the US economy proved much more resilient in 2023 than expected by consensus, many of our respondents believe an economic downturn has merely been pushed back to 2024,” said Scott Konicki, Managing Director in Goldman Sachs Asset Management. “They have little confidence of an immediate moderation in core inflation, the majority expecting core inflation to not fall back to its target level by the end of 2024. Those surveyed were evenly split on whether the US Federal Reserve will cut interest rates in 2024, although few expect further hikes.”

Key highlights from healthcare investment survey respondents include:

• 41% intend to increase alternatives allocations in unrestricted cash and investments (UCI) in 2024, while only 5% intend to decrease
• 16% are “extremely” or “very” concerned about a recession, compared to 63% last year
• Yet 62% expect a recession to occur in 2024
• 54% of Defined Benefit (DB) pension assets are allocated to fixed income, up 10 percentage points (pp) from the year prior – now at the highest level in our diagnostic’s history
• 68% are “extremely” or “very” concerned about operational pressures, the most cited risk
• 43% are actively exploring artificial intelligence (AI) and machine learning

“The rollercoaster developments of 2023 helped not-for-profit healthcare systems and hospitals partially recover from the market turbulence induced by the COVID-19 pandemic and the further declines in asset values in 2022, although they did not recoup all their previous losses,” said Mr. Konicki. “Despite the market volatility, the investment offices we surveyed report being able to continue managing risk and supporting their systems in delivering healthcare to communities.”

Survey respondents included 37 chief investment officers (CIOs) and investment professionals at leading US-based healthcare systems and hospitals with a combined investment value around $379 billion. Academic medical systems and multi-state hospital systems each accounted for 28% of respondents, followed by single-state hospital systems (20%), children’s hospitals (18%), and other (6%).

Asset pools represented include UCIs, DB pension plans, defined contribution plans (DCs), self-insurance, and health insurance plans. Most respondents had multiple pools, the largest tending to be UCI (29 over $1 billion in assets).

Markets May Return to Normal After Run of Extremes

According to survey respondents, the median expected return assumption for UCI and DB pools are 6.5% each, both numbers marking significant increases from last year.

The most common market outlook prediction was mid- to upper-single digit equity returns – yet 33% of respondents expect equity values to fall over 2024. While expecting less volatility, there is disagreement about where interest rates will end the year: 78% expect the 10-year US Treasury yield to close within a wide range, 3.5%-5.0%. Most respondents expect credit spreads to widen.

Respondents expect the best performing asset classes to span capital structure and liquidity spectrums. Most favored for 2024 were US equities, private credit, high yield debt, and cash and short-term securities.

Private real estate is the least favored asset class. Respondents are pessimistic about emerging market equities and bonds, potentially reflecting uncertainty surrounding China. In net terms, the asset class respondents favor most is US equities, as they did last year.

Progress on US growth and inflation have driven a decline in overall macro risks. Geopolitical turmoil, recession, and monetary policy continue to lead macro concerns. The fiscal policy scares of 2023 are increasingly weighing on investors.

Micro concerns are important. Operational pressures top the list: 68% of respondents “very” or “extremely” concerned. Labor costs continue to weigh heavily as wage inflation stays sticky.

Alternatives Keep on Keeping on Through the Cycle

Asset allocations for UCI and DB plans are less similar than in our first diagnostic six years ago. Across both major asset pools, healthcare investors’ asset allocations have been steadily shifting.

In UCI, respondents reported the largest year-over-year increase in alternatives allocations in the history of our diagnostic, closing at 32%. Some of that may be based on the 2022 public market selloff, although intended allocation changes revealed later on point to a more secular trend. Fixed income DB plan allocations grew at the expense of public equities, consistent with the broad trend among corporate plans.

Material differences were reported by asset pool size: larger pools overwhelmingly allocate more to alternatives. The smallest UCIs increased these allocations 17%, the largest 42%.

Cash and Fixed Income Rising in Importance

Cash allocations by UCIs remained high, while public equity and fixed income allocations were down slightly over the year, in line with market movements over 2022.

Fixed income allocations in DB plans grew 10pp, mostly driven by government and agency debt.

Respondents intend to increase allocations to cash and short-term securities, funding the changes by reducing allocations to public equities. Within public equities, respondents plan to marginally increase allocations to the US on a net basis while reducing exposure to other regions.

Respondents intend to increase securitized products, even as fixed income allocation changes stay balanced.

Respondents show most interest in private equity and private real assets, despite pessimism for private real estate in 2024. UCI allocations to hedge funds continued to decline, albeit from fairly high levels, with 45% planning to reduce hedge fund allocations in 2024, in line with last year.

Impact Investing Increasingly Found in Private Markets

Impact investing and policies continued to be a focus. Respondents are more focused on selecting diverse managers than investing in diverse ranges of impact strategies, and 40% plan to increase their allocations to diverse managers. Allocations to impact strategies were entirely in private markets, and 33% report planning to increase private market impact strategies. Interest in public market impact strategies was lower than last year. As for clean energy policies, 65% report not having one, although those that do increased from 15% to 27% year-over-year.

Methodology

The sixth annual Healthcare Investment Diagnostic from Goldman Sach Asset Management features insights from leading US healthcare systems and hospitals. It includes details of their macroeconomic and market outlooks, achieved and expected investment returns, asset allocations and approaches to impact & diversity, resourcing and technology.

We surveyed 37 CIOs and investment professionals across academic, children’s, single-state and multi-state healthcare systems and hospitals representing around $379 billion of investments. As of 12/31/2022, total assets under supervision by system ranged from $483 million to $110 billion.

The investment pools covered in this study include Unrestricted Cash & Investments (UCI) and Defined Benefit Plan(s), with assets ranging from under $250 million to over $5 billion.

About Goldman Sachs Asset Management

Bringing together traditional and alternative investments, Goldman Sachs Asset Management provides clients around the world with a dedicated partnership and focus on long-term performance. As the primary investing area within Goldman Sachs, the business delivers investment and advisory services for the world’s leading institutions, financial advisors, and individuals, drawing from a deeply connected global network and tailored expert insights across every region and market. Goldman Sachs has $2.8 trillion in assets under supervision globally as of December 31, 2023.