More questions than answers in Hartford OCIO move

There are more questions than answers as to why the board of directors of Hartford HealthCare Corp. summarily let go all the members of its in-house investment staff on Sept. 20 without warning. The board then turned to an OCIO model for management of $4.3 billion in the company's defined benefit and endowment funds.

Hartford HealthCare's board of directors approved the hire of Morgan Stanley as the firm's OCIO manager to replace the internal investment team, a statement from the company said.

Morgan Stanley manages $62.4 billion of outsourced assets under management as of March 31 and ranked 12th in Pensions & Investments' annual OCIO survey.

The change to an OCIO approach for investment management is puzzling, observers say, given that the investment team, led by CIO David J. Holmgren, has had strong returns over the years, including producing a 1.1% gain in the three months ended March 31 while the policy target was down 3.8%.

In contrast, Mercer reported a 5.1% median decline for endowments in the first quarter of 2022.

Over several periods ended March 31, Hartford HealthCare's returns easily outpaced its policy benchmark: the one-year return was 14.5% (policy target, 7.1%); 12.2% over five years (8.9%); 10.1% for the seven-year period (7.2%); and 10.1% over the past 10 years (7.5%).

For the fiscal year ended June 30, Hartford HealthCare returned 1.3% in a year when most peers were posting negative returns.

Mr. Holmgren was not available for comment.

Investment team members were surprised by Hartford's move to OCIO.

The seven members of the company's investment committee had no idea that the board of directors of Hartford, Conn.-based Hartford HealthCare had decided to scrap internal investment.

A meeting with the investment committee was hastily called on Sept. 20 and it was only then that members of the investment committee learned that Hartford Health-Care's board approved the dismissal of the internal investment team and move to Morgan Stanley.

Five of the seven people serving on the investment committee resigned after the meeting. Among them was David M. Roth, chairman of the Hartford HealthCare investment committee.

A request for interviews with Jeffrey A. Flacks, the company's president and CEO, and Chibueze Okey Agba, executive vice president and chief financial officer, to explain the change to an OCIO manager was not granted.

It's not unusual for non-profit health-care companies like Hartford HealthCare to hire OCIO managers, because many have multiple complex pools of assets ranging from defined benefit plans, endowments, operating funds, donor funds, foundation funds, self-insurance and reinsurance pools and more, said an OCIO specialist who spoke on background.

While internal investment teams often do manage these pools it can be difficult to maintain the team and hold on to employees who are recruited away by other companies, said the source.

Moving to an OCIO investment model provides stability in running a firm's funds because the manager has large teams to handle investments. Larger OCIO providers also tend to get preferential pricing from the underlying fund managers in the program, savings which are passed down to OCIO clients, according to the source.

In an interview, Mr. Roth said the investment committee had requested a meeting to sort out governance issues regarding the Hartford HealthCare funds prior to the change in investment management. That end-of-September meeting never happened.

Mr. Roth said it was his perception that Messrs. Agba and Holmgren were involved in a power struggle.

Mr. Agba, who joined Hartford HealthCare in September 2021, took actions regarding the investment portfolios without consulting the investment committee, Mr. Roth said.

One anonymous former investment committee member said Mr. Agba had earlier circulated a request for proposal for a general consultant for the investment funds without engaging the investment committee.

It's not clear whether Mr. Agba issued an RFP for the OCIO search, the source said.

"What we (members of the investment committee) were very upset about was the lack of process regarding the decision to move to an OCIO approach. When they did this without engaging and informing the investment committee, it's unacceptable to me," Mr. Roth said.

Governance specialist Frederick "Rick" Funston, partner and CEO of Funston Advisory Services LLC, Bloomfield, Mich., said the Hartford HealthCare decision regarding the move to OCIO investment management did not rise to the level of a governance issue, because the board of directors made the decision.

"The investment committee serves in an advisory role to the board. The Hartford HealthCare board didn't engage with the investment committee about the change in investment management and that's its prerogative," Mr. Funston said.

He reiterated that "this situation is not a governance issue. It's a public relations disaster. The board created a lot of ill feeling with investment committee members. If I were in their shoes, I would be upset too because of the abruptness of the action."

That said, Mr. Funston added, "Hartford HealthCare will have a challenge when it comes to rebuilding the investment committee. Who will want to step up and join the committee given the action of the board?"

Mr. Roth stressed that he is not contesting the board's role in making decisions about the investment management of Hartford Healthcare's investment funds.

"The OCIO search was all behind the scenes. We knew nothing about it until the decision to hire Morgan Stanley already had been made," Mr. Roth said, noting "we had no information about the due diligence process regarding the selection of Morgan Stanley."