The one consistent thing about hospital companies' international investment exposure is its inconsistency.
Take for example Mercy Health Services, Farmington Hills, Mich. - of its $1.7 billion in investible assets, 28% was in international investments as of Dec. 31.
On the other side of the scale is BJC Health System, St. Louis. As of Dec. 31, it had none of its $1.4 billion in investible assets in international investments. Only in February did it make its first international allocation, of about 3% of assets.
Among medium-sized systems, in terms of assets, Allina Health System, Minneapolis, had 25% of its $895 million in international.
While no trend can be discerned, those who invest internationally say the main reason is to reduce volatility in their overall portfolio.
"We went international when we instituted our program in 1994," said John Meehan, director of treasury services at Bon Secours Health System Inc. Marriotsville, Md. "The rationale was to go international to provide for diversity and dampen volatility . . . It helps offset U.S. markets."
Bon Secours had 5% of its $400 million in investible assets in two international mutual funds with Harbor Capital Advisors, Toledo, Ohio, as of Dec. 31.
Jim Morrissey, vice president at Miller Anderson & Sherrerd, West Conshohocken, Pa., who is responsible for the firm's health-care business, said that introducing a global investment portion to a portfolio provides two possible opportunities: a lower risk potential with a similar rate of return of a domestic portfolio or higher return potential with the same level of risk of a domestic portfolio.
Mr. Morrissey compared two portfolios studied by Miller Anderson from 1990 through 1996: the first had 60% domestic indexed equities and 40% index bonds, while the second had an asset mix of 50% U.S. index stocks, 24% U.S. bonds, 6% high-yield bonds, 14% foreign stocks and 6% foreign bonds. The first portfolio returned 14.3% with a standard deviation of 10.2; the global portfolio returned 14.5% with a standard deviation of 10.2.
While the 20 basis-point difference in return doesn't seem that significant, the timeframe was when foreign investments were not doing well, Mr. Morrissey said. From 1990 to 1996, the Standard & Poor's 500 Stock index returned 15% with a standard deviation of 12, where the Morgan Stanley Capital International World Index (excluding the United States), returned 4% with a standard deviation of 18.
Investing in countries that have different economic cycles than the United States will prove to be beneficial in the long run, according to Mr. Morrissey.
"The drive of U.S. stocks vs. international is because U.S. companies have been more competitive (recently) but we don't think this is a long-term trend," he said.
For those funds that do invest in international, there doesn't seem to be an overriding trend as to how and where they invest.
An official at BJC said the hospital system's investment committee had been talking about a commitment to international for a while before it made its first step in February. The official, who asked not to be named, said the main reason for the move was to lower the volatility of the equity portfolios. Now, about 6% or $21 million of the $347 million pension plan is with one Toronto-based money manager. Another $6 million will be spread among BJC's corporate assets - such as the endowment and foundation asset pools, the official said. The official said the international manager is limited to the MSCI Europe Australasia Far East Index countries and Canada. There are no sector restrictions, but the manager is not allowed to put more than 5% in one company.
Bon Secours' Mr. Meehan said its allocation to international wasn't large enough to warrant a separate account, so it hired Harbor Capital to manage 5% of the assets in an overall international institutional mutual fund and one growth international mutual fund.
For Rutland Regional Medical Center, Rutland, Vt., separate accounts became an option when it hired Brandywine Asset Management, Wilmington, Del., earlier this year. The hospital, which also has a primary care physician network and several other related facilities, originally had 5% of its assets in international with a previous manager. Rutland wasn't satisfied with the performance of the manager, which it wouldn't identify, so it hired Brandywine and shifted a 5% allocation from real estate to international, bumping international to 10% for the whole portfolio. International investments, though, are only in the pension fund, said Wesley Hrynchuk, treasurer and chief financial officer. While he wouldn't say how much Rutland has in investible assets, he did say the 10% international allocation in the retirement portfolio is no more than $10 million.
Corporate assets have a shorter term duration, so international exposure is not an option right now, he said, adding it's possible corporate assets might get an international allocation once the board reaches a certain comfort level with its current investments.
Mr. Hrynchuk said the board put very few restrictions on Brandywine, in terms of geographic sectors or investment screens.
"Our philosophy is that you hire a professional to manage money. Once you put restrictions on them, you give them an excuse for underperformance," he said.
While all hospital officials interviewed shied away from emerging markets and more aggressive international strategies, both Mr. Morrissey and Paul Ehrlichman, managing director at Brandywine said it's inevitable for many hospital systems.
"Some are still questioning why they need to do international," Mr. Ehrlichman said. "If the S&P continues to boom, they'll eventually need to diversify (to international). Or, if it goes down, they'll be looking for better returns elsewhere."