Merge Investment and Financial Decision-Making to Cut Risk

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New research suggests that healthcare organizations should strive for greater cooperation between the investment and finance arenas.

Research from SEI Global Institutional Group, an Oaks, PA-based asset management company, suggests organizations that use traditional risk/return asset allocation strategy—which separates financial and investment decision-making—may place their credit ratings and debt capacities at risk.

A typical governance structure consists of an investment committee that makes long-term investment decisions, while financial decisions such as issuing debt are made at the CFO level, says Brad Stephan, investment director with SEI Global Institutional Group. Those two structures are the primary source of liquidity for organizations to support their objectives. “We intend to marry these decisions,” he says.

Stephan says bringing the balance sheet together with the asset allocation decisions typically made by the investment committee could have a big impact on the credit rating, “which is driving other parts of the business.”

For example, at some institutions where the investment committee might be acting independently of finance, “they get a couple years of significant investment returns and everyone feels they can reallocate to equities,” says Stephan. Doing so causes the risk exposure to increase, which may have a material impact on credit rating, and thus borrowing terms.

“Managing interest rate risk gives you the ability to afford to take risks in other places,” says Jim Morris, senior vice president of institutional solutions at SEI. He contends that through modeling and scenario testing, an investment committee and finance committee together can determine how a diversified investment portfolio likely will perform over a variety of time frames based on various asset allocations.

Investment committees look at metrics like absolute return, returns relative to a benchmark, standard deviations and drawdown risk, says Morris. “Those are good for building efficient portfolios.” But healthcare organizations should combine those measures with metrics at the balance sheet level that are being affected by those investment decisions, such as days cash on hand, unrestricted cash debt and the cushion ratio, says Morris.

“All we are saying is, you have to take risks, but are you taking risks you’re going to be compensated for?”

—Philip Betbeze




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