On top of all the other demands that non-profit hospital and health system executives juggle, enterprise risk management is an important but often overlooked part of constructing investment portfolios that should be added to the list, a research paper from Russell Investments says.
Paying closer attention to goals and exposures throughout an organization can lead to a more effective asset allocation for its multiple asset pools, the paper argued.
Russell defines enterprise as all aspects of an organization, including operations, governance and finance, plus external factors such as capital projects or acquisitions.
Managing their systems' investible assets involves lots of moving parts, with multiple asset pools that include defined benefit and other retirement funds, operating capital and foundation assets, all of which have specific goals and return targets, and distinctly different abilities to tolerate short-term losses.
The paper offers a framework for evaluating asset allocation decisions across three key considerations: investment portfolio risk tolerance, portfolio construction and portfolio implementation.
Risk tolerance is a particular issue for hospital executives, whose reliance on debt financing for liquidity makes credit ratings a constant concern. With multiple balance sheets, hospitals also need to be aware of market exposures within each investment pool, and how investments affect income statements or generate income.
More efficient construction of investment pools to support an organization's goals “is an important — often neglected — part of the asset allocation process,” author Mary Beth Lato, senior asset allocation strategist, wrote in the report.
“You have to get all the silos of the organization to communicate. It's time consuming, but those who have done it say it is really worthwhile,” said Heather Myers, New York-based managing director for non-profits at Russell Investments, in an interview.
Part of the pressure to pay closer attention to their portfolios is coming from significantly larger regulatory demands, notably the Affordable Care Act. The non-profit health-care sector also is changing, through mergers, takeovers and other competitive strategies.
“Many of those people are feeling more challenges today relative to their peers,” said Ms. Myers.
“Hospitals and health-care systems have so many pressures on them in so many ways that the investment pools are often secondary. Many have not had the time to re-evaluate” their portfolios to make sure they are adequately diversified across strategies, she said.
The full paper is available on Russell's website.