CORAL GABLES, Fla. - Setting and implementing a strategic asset allocation plan sounds like a straightforward task, but many health care financial management professionals are finding just the opposite.
At the Healthcare Investment Management Forum in February, financial officers from hospital groups, investment managers and consultants showed how effective investment policy statements, asset allocation, communications, investment education and other critical elements have helped health care investment professionals take better control of the battery of funds they oversee.
Many speakers at the conference, sponsored by the Healthcare Financial Management Association and the Institute for International Research, posed a series of questions health care financial officials need to ask themselves - and their boards - when developing investment policies, asset allocations and making manager decisions.
In explaining an investment policy, strategy and results to boards, Drew Carrington, senior consultant with Arthur Andersen Institutional Investment Consulting, Atlanta, said financial officials need to develop a clear definition for what each fund - within the entire pool of assets - is being used. Boards need to decide and understand the reason certain assets are being used for different kinds of purposes, including endowment, insurance reserves and funded depreciation.
"The lack of clarity regarding the ultimate use of the money actually demands a more rigorous approach to policy and governance," Mr. Carrington said, adding a heightened focus on education will keep board members from second-guessing decisions and trying to take over implementing the investment policy and strategy.
It's important not to micromanage, but rather to delegate certain responsibilities to specific groups. The finance committee and board should be overseeing the functions of the subcommittees and staff; manager selection and policy changes should go to an investment subcommittee; and staff should be responsible for implementing investment policy and strategy.
"Each should have clearly defined roles and responsibilities," he said.
Once the structure is established, an asset allocation strategy needs to be developed.
Uncertain operating environments and increased competitive pressures have pushed health care investment officials to find ways to earn better returns on their investments, said Anita Andren, principal at William M. Mercer, Chicago. One of the riskiest things a health care investment manager can do is to be too cautious in managing assets.
Ms. Andren stressed hospital investment professionals need to develop a strategy under which assets - in pools that have individual objectives - work together to support the organization's total financial objectives and mission. Once a strategy is created, it's critical to anticipate and manage change, and to know when to stay the course even when markets fluctuate.
Robert Mueller, administrative director-treasury at Geisinger Health System, Danville, Pa., echoed Ms. Andren's comments and said the equity investment strategy should be mission driven, rather than market driven.
In the design phase of the investment strategy "you quantify the mission statement of the portfolio," Mr. Mueller said. "You need to have a document that clearly defines the investment policy . . . A written investment policy is paramount in creating any type of equity strategy."
After this has been created, manager selection should be based on how individual managers interact and achieve the goals defined for the asset class, Mr. Mueller said.
"It's important for you to coordinate their efforts," Mr. Mueller said, adding he conducts a meeting with Geisinger's managers about every two months to review the goals and objectives. "How you communicate not only to the board but also to the managers - your goals and objectives" is very important in maintaining the investment strategy.
Managers straying from the intended goals can happen more often than not, said Jesse Bean, treasurer at Catholic Healthcare West, San Francisco. One of Catholic Healthcare's managers was providing great returns, but was hurting its the organization's market neutral objective.
"If (managers) drift, they can really jeopardize the neutrality we're trying to accomplish," Mr. Bean said. "We don't want to be in the timing business. We want a program that's well thought out, so tracking managers is really critical for us."
Previously Catholic Healthcare used balanced managers that would make investment decisions, but that pushed 80% of the Healthcare group's assets into bonds.
"It's difficult to meet expected returns based on this allocation," Mr. Bean said.
Giving a manager time to perform is important, but financial professionals should not be hesitant to terminate a manager when appropriate, said David L. Kudish, president of Stratford Advisory Group Inc., Chicago.
Evaluating a manager is similar to the process used in selecting one, Mr. Kudish said, adding a better manager selection process will provide more longer lasting relationships with managers.
"If you control the process better on the selection side, you'll do a better job at controlling the performance side on an investment basis," Mr. Kudish said.
Health care professionals should know why they selected a given manager, and should measure the manager against the appropriate benchmark. Mr. Kudish added that managers also should be evaluated on key qualitative factors, such as organizational stability, as well as quantitative factors such as performance.
In addition, health care professionals should seek full disclosure from their consultants. Consultants, Mr. Kudish stressed, should have absolutely no financial arrangements with investment managers.
