An HFMA Healthcare Financial Pulse Resource
Looking to improve your portfolio investment strategy? Consider these tips from Tim Sheehan, managing director with healthcare investment banking firm Cain Brothers.
1. Encourage active involvement at the leadership level.
When it comes to portfolio investing, Sheehan wants to break down organizational barriers and bring investments and hospital operations into greater alignment.
“I’m a big believer that managing a portfolio is not an isolated exercise,” he says. “Investments are an integral part of operating a hospital or health system. We can no longer simply turn it over to some insular investment committee with trustees and consultants. Doing so only loses the focus. I greatly prefer to see hospital executives closely involved in these decisions – it creates far greater levels of accountability. Your portfolio is an asset that has to produce a cash flow – just like any other asset in the hospital.”
2. Imagine the worst.
Sheehan also recommends that hospital executives plan for potential downsides. “As we’ve seen in the past year, portfolio losses can have crippling effects on the institution. Instead of pursuing total return, it makes more sense to set worst-case goals: ‘Here’s the minimum amount of cash that the portfolio must generate.’ That’s not the expected return – that’s the worst-case return. If you don’t meet these minimums, then the portfolio can be a massive drag on the institution’s ability to access capital. Focusing on potential worst-case scenarios will re-orient your investment decisions toward a more conservative perspective that emphasizes capital preservation. And in today’s environment, that’s an excellent idea.”
3. Don’t aim for “normal.”
Adopting the prior two recommendations also makes it easier to implement Sheehan’s final suggestion: Vary the expected returns.
“Typically, the investment committees allocate assets and average the returns over time,” he says. “They assume those returns will always follow a normal distribution curve. But distribution curves shift over time and correlations shift as well. You need to consider where you are today. Uncertainty is not the same as risk. To me, risk is the likelihood of not hitting your minimum required return. When you start to manage a portfolio around that metric, you have greater predictability about your institution’s financial picture – and that gives you greater confidence with your planning. That’s the approach we always recommend. The beauty of this approach is that it will not necessarily limit your returns on the upside. In today’s financial markets there are investment strategies that produce asymmetrical return profiles.”