Given the complexity and changing dynamics of most healthcare institutions, the various investment programs of these entities require a high degree of customization and individual analysis. Ellwood Associates evaluates the key variables of each embedded investment program separately to determine liquidity needs, investment time horizon, financial reporting impact, and sensitivity to risk.
The following represents some of Ellwood's basic evaluation tenets in structuring investment programs for healthcare institutions:
Operating Reserves
It is Ellwood Associates' experience that operating funds' circumstances center on cash flow analysis. Typical funds falling into this area include funded depreciation reserves, debt- related reimbursement funds, and operating cash reserves. We analyze levels of cash flows relative to the asset base; variability of cash flows; sources of cash flows and their consistency; and the hospital or system's dependency on income flow from the assets to support operations.
This analysis involves a thorough understanding of the balance sheet and income statement mechanics for the hospital/medical center and its interrelated entities. Five year-forecast budgets are particularly helpful in this process. Through our cash flow analysis, we are able to help the client to determine a fund's appropriate investment time-horizon, and the level of tolerance the assets have for short-term fluctuations in value.
Liability Insurance Funds
We believe that a thorough understanding of the circumstances surrounding the liabilities involved will logically lead to an accurate understanding of their appropriate needs. Once we understand a fund's circumstances, we can help the client to establish polices that best meet the structure of the liabilities.
Liability Insurance Funds also require thorough cash flow analysis. Here the issues can be more complex due to the nature of the actuarial valuation process surrounding these trusts. We have had much experience with our current clients in developing asset allocation policies for these types of liabilities.
Other Investment Programs
Ellwood also assists hospitals and healthcare systems in structuring and managing defined benefit pension plans, defined contribution plans (401k, 403b, etc.), and foundation/endowment funds.
Asset Allocation
Our asset allocation advice is the primary tool we use to improve the probability of meeting its investment objective. Identifying the appropriate asset classes for investment and then the appropriate allocation across these asset classes is critical in the proper structuring of an institutional portfolio. Our asset allocation work begins by evaluating whether the portfolio's current asset mix is expected to meet the investment objective and what the probability is of doing so. We then make specific recommendations to improve the probability of meeting the objective over time by adjusting the asset allocation, introducing new asset classes and adjusting the diversification within each asset class. We consider the impact of these changes have on the investment constraints as well.
Investment Manager Research
Our investment manager research is another key area where we add value for our investors. We focus on identifying best-in-class managers in both traditional and alternative asset classes that meet our strict manager research criteria and that have outperformed the appropriate index and universe benchmarks after the deduction of investment management fees. Our traditional manager research area focuses on U.S. and non-U.S. equities as well as fixed income and covers all major investment styles within these asset classes. Our alternatives asset class research team has developed extensive topical research that supports the use of private equity, real estate and hedge funds in a total portfolio asset allocation. Additionally, this team has identified the market leaders in both direct and fund-of-funds investment managers in these areas. We conduct our own manager research in these areas.
For hospitals and healthcare systems, manager evaluation and selection focuses on identifying superior investment managers that exhibit strong upside market performance and capital preservation and protection during adverse market conditions. We also seek managers that tend to exhibit low turnover so that realized losses are minimized in the financial reporting function.
Performance Reporting
We produce comprehensive quarterly performance reports as well as summary monthly "flash" updates to assist our investors in the monitoring of the total portfolio as well as the individual manager allocations. Our reports are fully customized to meet the individual needs of each investor and include background information on the capital markets, specific details about the portfolio's total value and asset allocation versus targets, and detailed analysis of each investment manager versus appropriate index and style universe benchmarks. As part of our performance reporting, we monitor the investment managers for changes in people, organizational structure and investment process. Communications with the investor's managers occur regularly and we are proactive in communicating any developments at a client's investment managers.