TREASURY AND CAPITAL MARKETS

Transcription

1 March 2018 Organizing an Investment Platform for Hospitals and Health Systems David Ratliff, CFA, and Eric A. Jordahl Healthcare leadership might consider these questions: Is there more to running an investment program than picking managers? As the hospital or health system evolves, should its investment approach also evolve? How can governance and senior leadership teams ensure the best use of their time related to the investment platform? Is there really a difference between managing a healthcare organization s long-term funds and managing those of other entities or individuals? The Healthcare Twist with Investment Programs Healthcare governance and senior management teams have a growing list of concerns related to ensuring the longterm health of the organization they lead. Given the sizable investment balances held by not-for-profit healthcare organizations, the four questions above have important ramifications. Gaining the full benefit of invested asset resources through the right investment platform is critical to the overall provisioning of financial resources required to make execution of organizational strategies a reality. As time is spent on important matters related to strategic advancement, the management of investment programs competes for leadership attention. A breadth of action items are required to ensure a suitable and successful investment platform. This can be daunting for, and often beyond the scope of, an investment committee without outside help or considerable management resources. A capable investment advisor with a wealth of good ideas can help steer an overall investment process. But, someone else s process and platform are best used when leaders have a solid idea of the broad strokes of what is best for their organization. Ample research and guidance exist for endowment-model investing. This style works well for organizations that have unrestricted asset pools with only limited connectivity to operations and strategy. Similar material is lacking, however, for organizing the invested asset platform for a healthcare enterprise. This article suggests an approach that helps leaders articulate the priorities of their invested asset program and tailor an approach for its sustained management. Be Wary of Drawing from the Approaches of Others Despite the unique nature of healthcare, investment professionals regularly apply, in a wholesale fashion, the investment positioning and performance management techniques common in other industries. Certainly healthcare management teams should be wary of a direct comparison between their strategy for a long-term investment pool and that of a defined benefit plan, higher-education or similar endowment, or Taft-Hartley trusts, for example. The accurate evaluation of overall investment management is difficult, at best. Few organizations share common characteristics and risk tolerances with their investment programs, yet investment performance, on the surface, appears to be transparent and worth cross-comparison. This really isn t the case. Evaluation of the benefit added from 1

2 an investment advisor includes not only the performance of the invested assets, but also the ability to provide highquality assistance to identify and execute suitable investment guidelines and strategy. As healthcare systems carve out or develop new value-added dimensions in their respective changing marketplaces, they may require very different investment strategies and programs. Cross-comparisons of healthcare providers become less effective; one construct for organizing investments will not work for all organizations. Platform Organization Managing an investment platform involves a broad range of duties. It is tempting to look at the long list with a narrow view toward tasks that could be handled internally, with the remainder handled through an external advisor or advisors. However, it is dangerous to delegate roles before completing a thoughtful assessment of alternatives and how each performs against the organization s culture, abilities, needs, and overall plan. Lack of such assessment may lead to suboptimal arrangements. Instead, first consider key controllable factors that influence the success of an investment platform, such as: A clear approach suitable to the organization Team and delegation structure Balanced expectations for risk and return To orchestrate these factors, participants within and outside the organization collaborate to define the approach, set guidelines, assess the right path, and execute efficiently. Figure 1. Platform Structure and Stakeholder Focus Note: For illustrative purposes only. Focus illustrates principal delegation roles and can vary among organizations. The level of discretion given to investment advisor(s) can be a deciding factor. Focus Philosophy Set approach centered around role of invested assets relative to broader enterprise. Parameters Set funds, team and roles, Investment Policy Statement (IPS), and feedback expectations. Strategy Within the parameters, refine methods and tactics to effectuate objectives in tune with environment. Implementation Ensure efficient execution with pronounced feedback and reporting. Governance Management Investment Advisor(s) Source: Kaufman, Hall & Associates, LLC 2

3 A four-part platform, as illustrated in Figure 1, can be a helpful organizational tool: 1. At the top of the pyramid, the organization s leadership i.e., governance and management sets the stage through a Philosophy of the organization s overall approach to invested assets. 2. Governance and management also document investment Parameters through an Investment Policy Statement (IPS) that defines the resources and fund guidelines. 3. Depending on the environment at the time, and the capabilities of the organization, Strategy is adapted to advance the overall mission, often with participation of investment advisors. 4. After leadership carefully constructs the Philosophy, Parameters, and Strategy, the final piece, namely Implementation, focuses on execution efficiency, commonly with an articulated split of duties among management and any investment advisor(s). Defining the Vision and Guidelines: Philosophy and Parameters Above all else, governance and leadership teams should ensure quality of the Philosophy and Parameters, which set the overall direction and ensure the structural attributes to empower the approach. Preserving internal influences for Philosophy and Parameters helps ensure that the stewardship of invested assets mirrors the priorities of the organization and limits susceptibility to external biases. The importance of solid governance and senior management influence on these aspects of the program cannot be overstated. Absent the clear articulation of the mission of the invested asset program, subsequent decisions can lead to potentially inappropriate fund structures and pursuits. Although historically many hospitals and health systems have used an endowment-like model to manage their investments and cash in a separate silo, healthcare s rapid change is stressing this approach for many. Business and market forces are encouraging a renewed aim to balance the growth of investments and related income with a thorough view of issues related to capital spending, strategic initiatives, and operating risks. To be clear, some healthcare organizations still enjoy the ability to set their investments on an island and incorporate straightforward endowmentlike practices. Sidebar: Organizing the Committee with Investment Oversight The organization of the committee with investment responsibilities requires consideration. First, consider the structure of the committee. An ideal size for many organizations is 6 to 10 members, who have a staggered tenure of at least a market cycle, and ample diversification of core knowledge and background. Second, consider the meeting frequency. Quarterly is popular, but valid arguments exist for more or less often. Ensure advancement via educational materials, including such items as surveys of various asset classes on a rotating basis. Third, consider meeting agendas. The content of meetings for any given year should be carefully and proactively determined. Not all meetings may have the same agenda; in fact, the best conversations often stem from designated deep-dives on certain topics. Ensure the highest strategic value is met and be wary of the pull of certain details; meetings often can be filibustered by review of a particular manager. Fourth is leadership. The success of many Committees hinges on the leadership provided by the Committee Chair. We ve witnessed wonderful collaborations that balance resultsoriented drive with steady consistency. A Committee Chair can both encourage regular questioning of the invested asset strategic direction, while reminding members of why strategies are executed in a tailored fit to the organization in order to stay consistent in approach and not chase the next trend. Source: Kaufman, Hall & Associates, LLC 3

4 In determining Philosophy, healthcare leadership teams should firmly declare the role of invested assets whether it fits an endowment model or is more integrated with the growing needs of, and threats to, overall organizational resources. As mentioned earlier, determining the approach that is right for an organization shapes the investment platform and frames resources required to make the associated Strategy s execution a reality. Parameters encompass many of the broadly enumerated duties of governance, and they may be expanded depending on the integration Philosophy. Management collaboration is essential for bridging intent with action. Parameters include the following: Design of the internal and external team involved with the investment program, distinguishing between roles and levels of discretion Allocation of funds to be managed and their associated intent Development of an IPS, which establishes a rigid corridor of defined goals and objectives, rules, strategies, and other factors to meet the objectives (see sidebar) A communication structure that offers appropriate care and feeding, inclusive of meeting frequency and agenda When Philosophy and Parameters are well done, governance may have less involvement with subsequent Strategy and Implementation, yet more confidence that their finer details reflect the right direction. With grounded Philosophy and Parameters, many organizations gain more clarity on their organization s best option for non-discretionary versus discretionary relationships (Outsourced Chief Investment Officer or OCIO ) with external investment advisors. Based on clear guidance and approach, many organizations shift a greater role of Strategy and Implementation to an outside investment consultant to make the vision a reality. Sidebar: Common Elements of an Investment Policy Statement Note: For illustrative purposes only, and not to be intended as a thorough list. Please consult your advisor for more information. Adoption/Governance Purpose/Objectives Return Objectives Risk Objectives/Volatility Constraints Liquidity Considerations Time Horizon Unique Constraints Tax Considerations SRI/ESG/Impact Investment Offers authority and a time stamp to the document along with the expectations for updating. Clearly states the intent and scope of funds for policy inclusion. Return objectives should have strong tie with Philosophy. Sets expectations of returns as suitable, often set to excess of inflation target, fixed return target, or excess of benchmarks target on a rolling X-quarter basis. Volatility constraints should have strong tie with Philosophy. Defining how risk will be assessed and any threshold tolerances helps Strategy. Consider defining permitted risks for certain asset classes (such as credit risk). Return and Volatility are strongly related, so Philosophy should guide how each may be approached in a complementary manner. Sets guidelines on the ability to access funds if sold. A popular method is staging restrictions as a percentage of the portfolio (e.g. 75% available within a week). Offers clarity for expectations related to the delivery of invested principal. A catch-all. For example, perhaps the organization wants to avoid investment in healthcare given exposure via its core business, or avoid industries that heavily influence the marketplace. Be mindful that some constraints may have downstream impacts to the ability to find good investments. Defines applicable tax considerations that influence the investment approach, if any. Articulates the limitations and pursuits driven by moral and ethical grounds. Be mindful that some constraints may have downstream impacts to the ability to find good investments, for return sake. 4

5 Asset Allocation Approach Performance Assessment Rebalancing Strategy Duties of Participants Reporting Guidelines Proxy Voting Service Provider Selection Supplemental Materials Offers further communication of approach. Often an optional item for an IPS, it articulates the methodology used to set Strategic Asset Allocation. It is particularly helpful for ensuring a thoughtful, consistent approach over time. Identifies whether performance is compared to an index or median of peer group, for example. Keep in mind that ideally, a market cycle of 3 to 5 years is sought to offer a full performance judgment. Regularly assess to ensure the exposures assumed are comparable between investments and benchmark; goal is to narrow extraneous factors. Provides rebalancing guidance and process, including who has authority to do so under certain time restrictions. Depending on investment philosophy, note that the rebalancing strategy may not be to rebalance at all such as with a buy-and-hold strategy. Summarizes roles and responsibilities of various parties, potentially including Board, Committee, Management, Investment Consultant, Investment Managers, Custodian, Actuary, Administrator/ Record-keeper, and others. Offers minimum reporting expectations inclusive of frequency and timeliness. States who is responsible for proxy voting for separately managed accounts. Articulates the extent of discretion or reliance on outside firms and who makes the hiring/firing decisions. As an IPS is freshened up annually, certain studies, including capital market assumptions, can appear as appendix items. These items can be very useful and bring practical benefits coupled with an IPS. Source: Key items adapted from CFA Institute: Elements of an Investment Policy Statement for Institutional Investors, May Setting Intent in Motion: Strategy and Implementation With the invested asset s purpose, approach, team, and guidelines set, Strategy looks to advance the overall aims within the context of the capital market environment and the organization s current capacities. Strategy aims to find a suitable and effective approach to capturing risk/return exposures, often through the means of private or public investment options inclusive of equity or debt. The portfolio s asset mix and the subsequent invested assets pursued define the vast majority of performance. Much like a funnel, the decisions narrow from general to specific. Asset allocations offer guidance to asset class or risk factor exposures for the portfolio in whole; it leads to decisions for investment managers and investment vehicles. These decisions include whether to hire managers to actively invest towards surpassing a set benchmark, or save on manager fees by investing in a passive approach seeking to track to an index. The latter approach often is used for asset classes in efficient markets, with large cap domestic equities routinely cited as an example. Still other investment options can serve as a protection- or opportunity-seeking modification to the portfolio. Dedicated investment managers may be engaged to focus on specific downside protection strategies or to pursue specific market opportunities, as a part of purposeful asset allocation. Or simply using tilts, or adjusted weightings within a preset range, may be enough to fulfill a short-run tactic without deviating too far from the long-term allocations. Ideally, there should be agreement among senior leadership and Governance on how to manage the asset allocation approach considering the ever-changing markets. Investing organizations may set a plan indifferent to flows of the market (e.g., Strategic Asset Allocation), or adjust weightings routinely with the market or active positioning (e.g., Dynamic Asset Allocation and Tactical Asset Allocation), or include a blend of these viewpoints (e.g., Core-Satellite Approach). The math behind the asset allocations can sway the answer greatly and should be understood by the investing organization. 5

6 Investment consultants typically have their favored approach to asset allocation. Investing organizations are well served to fully understand the merits and limitations of such an approach to ensure that it complements the Philosophy of the invested asset platform. A discussion of asset allocation would be exceedingly difficult and overly susceptible to personal preferences without first being grounded in Philosophy and Parameters. Leadership should be cognizant of the engrained feedback loop among points in the pyramid. For example, Parameters may give rise to restrictions in asset structure or vehicles available, yet certain Strategies may call for flexibility. Depending on the entity, and certainly over time, options for investment may change. Finally, Implementation sets framework elements into motion. Its key goal is to accurately and efficiently execute the detailed and approved Strategy. If leaders are questioning the why or merits of each individual transaction, perhaps too much definitional Parameter and Strategy ground has been left to the Implementation phase. Ideally Implementation lets individuals outside leadership take charge of the execution details to enact Strategy. Governance and senior leadership may be narrowly involved through escalation events and routine monitoring. Required Framework Tasks Figure 2 illustrates how various tasks of a common investment program can be allotted to Philosophy, Parameters, Strategy, or Implementation. The tasks are offered in three seasons during the lifecycle of an investment program: Infrastructure, Portfolio Design, and Portfolio Monitoring. Infrastructure offers the building blocks of an investment platform. Portfolio Design and Portfolio Monitoring involve the invested asset planning and ongoing maintenance, respectively. The items with the greatest impact reside at the governance and senior management levels as shown in Figure 1, thereby ideally under tight control. Figure 2. Common Tasks within the Investment Framework Infrastructure Portfolio Design Portfolio Monitoring Philosophy Internal vs. External Duties Enterprise-Relevant Framework Ongoing Alignment with Enterpise Parameters Oversight Plan and Calendar Investments Policy Statement (IPS) IPS Compliance Strategy Asset Classes Available Strategic Asset Allocation, Manager Selection Rebalancing, Tilts Implementation Contracting Investment Execution, Directives Reporting Source: Kaufman, Hall & Associates, LLC 6

7 Depending on a variety of factors, the organization may choose to seek an external party to assist as an investment advisor. This framework does not argue for or against such an option, but rather helps organize the key focus points for each party involved. For example, some organizations may view the Implementation steps of contracting or approving investment directives as warranting the time and attention of senior management. On the other hand, organizations that choose to delegate these or other Implementation steps certainly are not in the wrong. The framework proposed here gives hospital or health system investment teams a way to talk through these nuances without defaulting to wholly adopting the guidance of an investment advisor or their peers. The end goal is to establish a thoughtful process that continually works to advance the organization s investment platform on behalf of its greater mission. For additional information, David Ratliff, CFA (dratliff@kaufmanhall.com) and Eric Jordahl (ejordahl@kaufmanhall.com) may be reached at End Note: While not an investment advisor, Kaufman Hall offers independent enterprise and treasury consulting to hospitals and health systems whose leadership teams wish to strengthen collaboration with their existing investment advisor or pursue an investment advisor selection process. 7