Investment consultants have been a staple in assisting institutional clients with asset allocation and manager selection duties. The financial crisis of 2008, however, put the issue of control at the forefront of many institutional investors’ minds and healthcare endowments and pension plans in particular are seeking a higher level of oversight. Although final authorization typically rests with an investment board, the concern is that many board members simply follow the opinion of the consultant.
The past 12 months have seen healthcare endowment and pension funds move away from a consultant-driven approach and hire internal investment teams. A $1 billion, New York City-based medical center was the first to create an internal department in early 2009, hiring a former chief investment officer from a Texas university. More recently, a $700 million, Texas-based healthcare system plucked multiple investment staffers from a $500 million endowment to spearhead its portfolio. Finally, a Midwestern healthcare system with more than $15 billion has moved away from its consultant-led approach and hired three former chief investment officers from U.S. endowments to implement its new policies.
Investment professionals with significant experience in the endowment model of investing, pioneered by Yale and weighted significantly to alternative asset classes, appear to be the primary hires for these new positions. Each of the firms has plans to overhaul its entire portfolio—plans that include a significant focus on increasing uncorrelated investments to protect its assets in falling markets. One healthcare system expects to shift its absolute return exposure from the funds of funds suggested by its former consultant, to a more direct approach, reducing the amount it pays in management and performance fees. Additionally, it expects to make $5 million to $10 million commitments to private equity opportunities in 2010, either through multi-manager or single-manager vehicles.
Consultants are not anticipated to lose significant ground, but institutions with sizeable portfolios are not hesitating to incur the additional expense of constructing an internal investment team, and these changes present significant opportunities for alternative investment funds.
