External asset management remains the rule for most health care organizations, but many of the larger ones are moving toward internal staffs.
The required infrastructure, and the ensuing costs, are the main barriers preventing the majority of health care organizations from in-house asset management of their assets.
But those willing to spend the time and money say in-house management can provide above-average returns and greater control over investment decisions.
"As financial pressures increase, a growing number of primarily larger health-care organizations are examining their asset allocation strategies and taking greater in-house control," said Karl Tourville, a principal at Galliard Capital Management, Minneapolis. "Health-care trusts are showing a willingness to examine more aggressive strategies aimed at higher returns." Galliard's client list includes a number of health-care organizations.
According to Mr. Tourville, in the past few years health-care organizations have moved a greater percentage of assets into more high-risk areas such as international equities, high-yield bonds and real estate.
"Many of the bigger health-care trusts have already moved to diversify their assets," he said. "Smaller equity stocks have provided the best total returns over time, while in the fixed-income area, longer maturity securities outperform over time."
Partners Healthcare System Inc., Boston, is one organization willing to take an active role in managing a good portion of its assets. "Our experience has been that in-house management is incredibly efficient from a cost-savings perspective," said Joseph Trainor, Partner's chief investment officer. "Over the last two years, our returns have been 60 basis points higher than the benchmark money market pool and 22 basis points above the short term pool."
Partners manages about 20% of its total assets internally.
However, in-house asset management remains anathema for many smaller and rural health care systems and hospitals.
Jay Terron, chief financial officer for Catholic Healthcare Partners, Cincinnati, confirmed his organization doesn't believe in-house asset management to be cost-effective. "We have less than 10% of our assets managed in-house, primarily those required for operating funds. There is a great amount of infrastructure required to manage assets in-house. Combine that with the large number of qualified asset managers out there and fees remaining competitive, and it is impractical for us to manage more assets in-house."
That sentiment was echoed by David Cutright, manager of treasury operations for Geisinger Health Care System in Danville, Ill. "We choose not to do any in-house management, as we don't see that as being a cost-effective way to go," he said. "It has been a long-standing decision of ours to tap into the expertise of external managers and maintain a diversified portfolio that way. We're pretty comfortable with that method, although we may examine the possibility of reviewing our passive vs. active investment options."
According to Pat Olk, director of cash and investments for Allina Health System of Minneapolis, external asset management will remain the route of choice for most health-care organizations. "I see a greater willingness to use more outside managers in order to tap into that level of expertise," Mr. Olk said. "For us, our in-house management really is determined by our liabilities. Half of our monies are in insurance reserves and we are somewhat restricted by state rules as to what our investments can be."
Allina has approximately $900 million in investible assets, of which less than 5% is managed in-house.
Mr. Olk cautioned there is "danger inherent for health organizations" to move toward higher risk and higher yield investments. "I think that you have to be careful that what you are doing in order to increase your returns doesn't backfire on you. My feeling is that you should focus more on your operational side to strengthen your financial situation."
Still, Mr. Trainor of Partners Healthcare remains convinced the argument for increased in-house management is a strong one.
"I think that there are certain spinoff benefits that come from doing in-house management," he explained. "A certain mindset is established when professional treasury people are working in-house. Also, I think that internal management makes us better at understanding and assessing the fixed-income strategies of our external managers."
While he conceded in-house asset management requires "providing the proper infrastructure," Mr. Trainor added a professional portfolio manager would be "paid the same as an external manager" without the same bonus potential as an outsider.
"I am certainly seeing an increased willingness on the part of some health-care organizations to examine the in-house option and decide for themselves if it will work," said Galliard's Mr. Tourville.
