Hartford HealthCare CIO defies markets in Q1

David J. Holmgren, chief investment officer of Hartford HealthCare's $4.3 billion in pension and endowment assets, says following the road less traveled is making all the difference for Hartford HealthCare's portfolio returns this year.

On May 18, Mr. Holmgren said he informed his board that the Hartford, Conn.-based health-care organization's portfolio posted a 1.1% gain for the three months through March 31, a period where beta — after more than a decade of powering hefty institutional returns — turned decidedly unfriendly.

Amid surging inflation and the first of an anticipated series of U.S. Federal Reserve rate hikes in March, both the S&P 500 stock index and the Bloomberg Barclays U.S. Aggregate Bond index suffered quarterly declines of more than 5% each.

Mercer reported a 5.1% median decline for endowments during the quarter.

Mr. Holmgren credited his portfolio's ability to avoid losses in what he termed the ugliest quarter in his 30-year career to actively diversifying to areas offering "alpha opportunity," with the goal of moving "where others are not clustered."

"We're 100% active," looking to shift toward areas of better opportunity, he said.

For real estate, by way of example, rather than settle for beta, "we pivot towards areas of growth." Hartford HealthCare made combined allocations to single-family residential housing in Orlando and Tampa, Fla., in 2019 and 2020 that came to roughly 1.6% of the portfolio. Those developments performed very well during the pandemic and in the first quarter as well, Mr. Holmgren said.

In a market where large-cap U.S. stocks continued to deliver top returns for much of the past decade, pursuing diversification in a methodical way took some discipline, he said.

If it's been all too easy "to ride the long-only, passive, large-cap, U.S. growth trade for the past decade," markets in 2022 have served as a reminder as to what the prudent man theory regarding diversification really means, Mr. Holmgren said.

"By being disciplined, long-term, active only and globally diversified, off consensus, we've been able to protect against" the simultaneous collapse of stocks and bonds this year, he said.

One of the unique aspects of Hartford HealthCare's portfolio, said Mr. Holmgren, is the absence of fixed income and duration, a big benefit this year as Fed rate hikes have left holders of 10-year Treasuries facing double-digit losses.

Anticipating a pickup in inflation on the back of aggressive central bank policy as early as three and a half years ago, Mr. Holmgren began moving instead to build up inflation-resilient "economic hedging" exposures in natural resources and infrastructure, and real estate portfolios, with respective weights of 12% and 6% as of March 31.

Mr. Holmgren said he's ultimately targeting a 20% economic hedging allocation that can provide further ballast should a stagflationary environment emerge. Hartford HealthCare is working with two partners — Edinburgh-based money manager abrdn and London-based alternatives firm Actis — on social and energy infrastructure opportunities to reach that target.

But moving early on restructuring the portfolio away from bonds brought some painful moments. When the Fed responded to the COVID-19 pandemic sell-off by slashing rates, which in turn levitated bond prices, "we looked like the stupidest investors on the planet," he said.

At the end of the day, however, Mr. Holmgren said ensuring resilience in down markets is a bigger consideration than underperforming in rising markets. It was "brutal" having no duration in March of 2020 but "having a down market capture of only 39%" in the quarter just ended is more important, he said.

As of March 31, meanwhile, Hartford HealthCare's portfolio had a 29% allocation to publicly traded equities, with 10% in U.S. equity, 7% in Japanese equity, 6% in emerging markets, and 3% each in frontier markets and global equity.

A recent change there, in line with that broader theme of active pursuit of opportunities, was a decision in the quarter ended Sept. 30 to shift 1.5 to 2 percentage points of the portfolio's 7% allocation to global equities at that time to frontier markets. Hartford HealthCare hired Boston-based Acadian Asset Management to oversee a roughly $80 million allocation to the firm's emerging markets microcap equity strategy

Elsewhere, volatility hedging allocations come to 28% of the portfolio, with 11% in hedge funds, 10% in private credit, 4% in multiasset/opportunistic credits and 3% in cash.

Of the remaining portfolio allocations, 11% is in venture capital equity, 10% is in buyouts and 4% is in direct venture capital equity.

Private equity and venture capital — the star performers in institutional portfolios for 2021 — gave back some of their gains during the March quarter, but Mr. Holmgren said strong results for his portfolio's private credit, hedge fund, natural resources and real estate allocations more than offset those losses.

Mr. Holmgren said while the current quarter could potentially prove to be even tougher, the market mayhem is throwing up opportunities that could help limit the potential portfolio damage.

For example, amid a "bloodbath" now for U.S. biotechnology companies that have left many with market capitalizations lower than the cash they have in the bank, Mr. Holmgren said his team earlier this year was able to take direct stakes in two unlisted companies, Eikon Therapeutics and Kallyope, at attractive valuations.

So as challenging as the current market environment is, "I'm actually optimistic," Mr. Holmgren said. Diversification leaves Hartford HealthCare well protected while the fund is positioned to take advantage of some of the opportunities "rising in this collapse," and if those opportunities "pay off as I expect during the current quarter, I think we might do just fine," he said.