Challenges for institutional investors in the healthcare sector – managing multiple pools of capital – are unique. We tailored an approach for this client who saw an opportunity in the current market environment to make changes and support funding for their future initiatives.
Our client was a major healthcare organization in a strong financial position, with more than $2 billion in assets.
The client's experienced investment team sought to bolster its long-term investment pool, ensuring their strong financial position was maintained well into the future, and with the potential for robust funding of future capital projects.
This sophisticated client saw an opportunity given the current low-rate environment to improve its capital efficiency through issuing debt to support future long-term capital projects and system programs. Proceeds of the bond issuance were placed in their long-term investment pool. While other non-pension asset pools typically use nominal or inflation-plus return objectives, for this long-term pool Russell Investments recommended a return objective based on the system's cost of capital plus an additional return premium. This allowed for the client to utilize a strategic asset mix that had sufficient expected growth potential to cover the cost of borrowing, as well as generate additional returns to meet the needs of future spending. This was done while ensuring the overall risk taken is aligned with that goal.
In order to reduce future challenges that might arise due to unintended risk within the long-term pool, we encouraged this healthcare system to define their asset allocation and strategy based on overall enterprise needs and risk tolerances. The customized long-term portfolio we built for them incorporated multi-asset strategies as well as core and extended fixed income strategies. It also included less-liquid assets, such as private real estate, private equity/credit, and hedge funds, all of which provide attractive return characteristics and additional diversification benefits to the pool. Utilizing less-liquid strategies may not be feasible for all clients, but we believe it was in this situation. This client had a long-term investment horizon and a decision-making group that recognized the inherent tradeoff between the return potential and unique risks that illiquid assets present.
Even in a low interest rate environment, borrowing to fund investments may not be suitable for all clients. However, we recognize that this valued client trusted our investment expertise enough to do so. Ultimately, we believe our holistic approach will serve them well in the long run, generating the required long-term return to outperform the cost of capital, while minimizing risk during periods of market stress.
This is one story. But it's not your story.
As an institutional investor, your situation, your constraints, and your challenges are just as unique to you. If you're ready to demand a customized, holistic solution set, we'd like to talk.
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