Alexian Brothers Health System, Chambersburg Hospital and the University of Pittsburgh Medical Center System are among the health-care organizations actively examining their asset mixes.
Yet given hospitals' generally late arrival to the bull market, some consultants now fear such organizations might be unprepared in the event of a major downturn.
Alexian Brothers Health System, Elk Grove Village, Ill., is doing an asset allocation study for its $53 million pension plan, said Christine Ostermeier, manager of treasury and capital finance.
Earlier, it increased the equity exposure of its $66 million of investible corporate assets to about 35% of assets from about 15%, she said. Yanni-Bilkey Investment Consulting, Pittsburgh, is the system's consultant; the asset allocation study is expected to be completed in the first quarter of next year.
"We expect the suggested changes to be implemented by the second quarter of 1998," Ms. Ostermeier said. "We're currently allocated to 60% fixed income and 40% equities for our pension plan. Right now, we only have a small-cap and value manager, and I can see us putting a growth manager in there. The investment committee refused to put international in our corporate portfolio, so I doubt that we will see that in our pension plan."
The University of Pittsburgh Medical Center has a "pretty active investment committee that continues to review our asset allocation on a semiannual basis," said Karen Hartley, the center's director of treasury. "Although our policy is set up to look at asset allocation on an annual basis, we've recently been more active than that."
Ms. Hartley said the center likely will conduct a full asset allocation study for operating assets "somewhere in the second or third quarter of 1998."
Yanni-Bilkey is the medical center's consultant.
The center has slightly more than $1 billion in general investible assets, and about $250 million in retirement funds.
In its non-pension assets, the medical center holds approximately 65% to 70% in equities, and the rest in fixed income.
"On the pension side, given its size and long-term nature, we've been a little more aggressive with a mix of about 80% equity to 20% fixed income," Ms. Hartley said. "We're very well diversified in our equity holdings, with a significant portion in large-cap growth and value. We've also had a growing exposure to index funds, using Vanguard's Index 500 mutual fund. I'd say we now have about 10% in indexing.
"We like having that as part of our portfolio as you can readily track its performance and the fees are rather low."
Unlike some other health-care organizations that were late to enter the bull market, the medical center has been in the equity market for about 10 years.
It usually uses the same managers for pension and non-pension assets.
Among the equity managers are Boston Co. Asset Management, Boston; Montag & Caldwell Inc., Atlanta; Ark Asset Management, New York; Sanford C. Bernstein & Co. Inc., New York; Mellon Equity Associates, Pittsburgh; and American Express Institutional Services, Minneapolis.
From zero to 60
At Chambersburg Hospital, Chambersburg, Pa., the past few years have seen a dramatic change in investment strategies.
Another change is possible as the hospital considers entering into hedge funds.
"About a month and a half ago we began examining that option and haven't reached a conclusion yet," said Patrick O'Donnell, vice-president of finance. "We hope to reach a decision on this in the next two months."
In recent years, the hospital made the move into the equity market.
"A few years ago, our pension plan was 100% fixed income," Mr. O'Donnell said. "But our board went through an educational process about the need for diversification and, around late 1995, we ended up moving to about 40% fixed income. On the equity side, we went into a range of value and growth holdings including large cap, small cap and international. We've also taken the same approach with our non-pension assets, although our diversification percentages may be a little different. For our general assets, our target is around 55% fixed income and 45% equities."
Total investible assets for the hospital are about $150 million, of which approximately $50 million are retirement assets.
The consideration of hedge funds follows a decision made earlier this year to withdraw some funds from the equity market.
"The surging market resulted in us pulling back about $3 million from equity into fixed income in late summer, which in terms of timing, worked out well," he said.
Words of caution
But the higher returns of the equity market bring with them an increased level of risk.
Chambersburg's consultant, Terry Bilkey of Yanni-Bilkey Investment Consulting, said that with the current volatility in the stock market, it is imperative that health-care organizations educate their boards about the risks of a potential downturn.
"At some point in time, we may have a fairly sizable correction along the lines of 10% to 20%," Mr. Bilkey said.
"If we assume that a correction of, say, 15% occurs, and you have 60% of your assets exposed to the equity market, you have about a 9% loss on your asset base. Now, on a $100 million asset base you would drop to about $90 million.
"One of the concerns would then become ratings, which reflect in part the strength of your balance sheet. That alone makes a market drop an important consideration for many hospitals.
"I don't think many (hospital investment) people have given much thought to communicating to their investors and local communities what such a correction might mean," Mr. Bilkey said.
Another area of concern for hospitals is "realized losses that would then directly flow through their financial statements. If one or two portfolio managers come in and say, 'We want to restructure the portfolio and therefore we're going to take realized losses of $4 (million) or $5 million dollars,' you can blow an entire year's budget. So the board may decline to restructure, and then you get into the issue of who's managing the hospital's investment money."
Tim Solberg, investment consultant at Hewitt Associates, Lincolnshire, Ill., said, "for the most part, people understand the equity market more than they do the fixed-income market. But the trustee of a public hospital is very much in a public fishbowl, as it's a public charitable trust. That's one of the main reasons hospitals arrived fairly late to the stock market, they wanted to be more conservative, and rightly so."
As a result of that conservatism, he said, most hospital organizations are still lower weighted in equities than are corporations or individual investors.
Jim Russell, vice-president of Diversified Investment Advisors, Purchase, N.Y., said health-care organizations, like other institutional investors, have to consider the duration of their liabilities and their risk tolerance before proceeding with equity investments.
"Near-term declines in the market can represent buying opportunities, but they can also represent a budgetary crisis for an organization that has so much concern near-term," he said.
According to Mr. Bilkey, in the event of a market downturn, some health-care organizations face a unique situation as a result of "arriving late to the party. I look at our (health-care) client base, and they range from those that have huge market gains to those that are relatively close in book and market."
He added it's likely health-care organizations across the country face the same scenarios. "If you just made your move to 60% equity in the last year, who knows what that might mean."