Healthcare Uncertainty Demands Investment Plan

Plugging the Outflows

If you answered “Yes” to the first question and expect your organization’s investment portfolio to need new or additional cash infusions, some degree of balance sheet de-risking will likely be warranted. This process can vary depending on the structure of the organization’s investment pools.

Multiple Investment Pools: For those that have already established separate investment portfolios by investment horizon, preparing for additional cash flows is often just a matter of reallocating assets from their long term pool to their short or medium term pool.

Singular Investment Pool: However, for organizations that only have a working capital pool alongside their investment portfolio, there are a few factors to consider.

• If the existing investment portfolio is already invested conservatively enough to easily fund the cashflows, no future changes may be required.
• Whether a short or medium term investment pool should be created and funded to ensure that the assets needed to be spent in the near term are not unduly exposed to market volatility.
• De-risking the singular portfolio may reduce administrative workload in the short term, but would increase complexity in the long term. This is because as outflow expectations shift over time, the asset allocation would need to be revised periodically too.

De-risking may also reduce the long-term expected returns and growth of the investment assets. For some organizations, this trade-off may be acceptable in exchange for greater near-term stability. The decision will likely depend on the size and duration of the potential cash flow shortfall that the investment assets are expected to cover.

Generating Investment Income

Long term Income: For those that said “Yes” to the second question and are looking to increase long term income generation from the investment pool, this would involve redesigning the asset allocation to target a higher return.

However, unless this approach is paired with increased diversification, which often includes illiquidity risk, the portfolio will also assume higher investment risk and volatility. For organizations that have increased outflow expectations, increasing volatility and / or illiquidity may not be tolerable.

Shorter term Income: For those organizations solidifying operating results over the medium term while generating additional near term income, we believe this can usually be accomplished without changing the asset allocation.

We recommend first evaluating the level of income support required from investments over the coming fiscal years. Next, we suggest analyzing the size and location of unrealized gains within the portfolio to inform potential trading decisions. The aim is to then generate the income needed for the current fiscal year and no more than that, allowing any remaining unrealized gains to be preserved for future periods.

Commingled Funds: As part of this process, investors in commingled fund structures will need to customize their rebalancing to focus on selling out of funds that provide gains or losses to bring themselves closer to their realized gain target for the year while minimizing deviations from the target investment portfolio. Importantly, now rebalancing must be done so the realized gain outcome aligns with what is most beneficial to the organization, not just mechanically moving back to targets or preferred positioning.

Separate Accounts: For an investor in separate accounts the philosophy is the same, but rather than looking for customized rebalancing across funds, they will want customized trading of securities within the separate accounts.

In both situations, it is possible that the decisions on trading could lead to a deviation from ideal portfolio positioning. Organizations with commingled funds will experience deviations at the asset allocation level, while those with separate accounts will have deviations within underlying security positions.

In these scenarios it is important that an experienced investor is overseeing the process and can properly weigh the specific trade-offs being made based on the fund setup and minimize the potential impact on investment results.

Putting it Together

Adjustments within the investment portfolio cannot solve operating problems caused by cuts to reimbursements, but they can buy health-care systems time to help steady the organization and adapt.

The strategy for each organization’s investment portfolio will depend on what type of support is needed most. With clarity on what the investment portfolio can and cannot do, and what the organizational priorities are, portfolio adjustments can be made to better support health-care systems through times of stress.

For now, the most important task for organizations is to determine what is needed most from their investment portfolio and put a plan in place with their investment partners to achieve that. The sooner the process starts, the better.

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