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Boston Children's Portfolio Has Done Well Despite Challenging 12-15 Months, Says Philip Rotner, Chief Investment Officer | Q&A

by trusted insight posted 7months ago 1218 views
Philip Rotner is the chief investment officer at Boston Children's Hospital, where he manages the hospital's endowment, pension, and short-term investment assets. He was appointed as Boston Children's first CIO in 2010. Previously, he served as a managing director at the MIT Investment Management Company and as vice president of the Bank of Boston. 

In this interview, he explains why Boston Children's Hospital continues to be ranked as the number one pediatric hospital in the world, how Boston Children's built its proprietary investment model to support its mission of treating sick children, and why health systems don't ordinarily plan to sustain 12 months of losses caused by a pandemic. 

Philip Rotner was named to Trusted Insight's 2021 Top Health System Chief Investment Officers.

Trusted Insight: Can you tell us about Boston Children's Hospital and your main responsibilities there?

Philip Rotner: Boston Children's Hospital is one of the top pediatric hospitals in the world. The U.S. News and World Report has ranked it number one for multiple years. It's a great organization to work for, with terrific people and a wonderful mission. People often wonder what organization we're part of, but we're actually an independent, standalone organization.

"The great irony of this tough year is that the investment markets have done fine."

We are also a Harvard teaching hospital, where we teach Harvard Medical School’s pediatrics. We're at 300 Longwood Ave, in the heart of Boston’s Medical District, with Harvard Medical School right next door to us. If you're facing the hospital, to the right you see the Dana Farber Cancer Institute. Across the street from them is Beth Israel Hospital, and right behind Children's and attached with a bridge, is part of Mass General Brigham.

The great irony of this tough year that while we've been living through 12-15 months of a pandemic, the investment markets have done fine. If all you could see was investment returns and you didn't know what else was happening in the world, you'd think everything was great. Boston Children's portfolio has done well through this pandemic, like many others. Our AUM has actually increased during this time. When we think of our long-term investment pool, we're approximately $4 billion in assets in the long-term endowment. We also have a short-term endowment of approximately $1.5 billion that we use to do capital projects and fund other activities. We also manage pension pool assets in our office, and that's another $900 million. In addition, we advise on a pool of physician assets that rolls up ultimately into the hospital's balance sheet. That is approximately another half a billion dollars. When you put all the pools together, it's a fairly sizable investment program—approximately $7 billion in assets.

Trusted Insight: How has the Boston Childrens asset allocation strategy shifted since you joined in 2010?

Philip Rotner: In some ways, it's an easy answer, because I joined in 2010 as Children's first CIO, so everything was new starting then. When I joined there was a smart, industry-professional type of investment committee that was working with Cambridge Associates as an advisor. In 2010, Children’s made a decision to build an internal investment team that could build a proprietary portfolio. Children’s goal was to create a portfolio that could match its risk appetite, access the best managers, and earn the returns necessary to help support its mission of treating sick children. Beginning in 2010, we began building out our program as a full discretion investment office with a new proprietary investment approach.

"Children’s goal was to create a portfolio that could match its risk appetite, access the best managers, and earn the returns necessary to help support its mission of treating sick children."

One of the first things we did at Children's was build a proprietary investment model, what we call a portfolio design model. Some people might call it an asset allocation model. We use the portfolio design model concept, because the first question we ask is: what's the risk here? Risk is something that is not always thought about in a holistic way. Oftentimes, people look at risk and they say, "Okay, here's the standard deviation, that's the risk." We think about it in a broader way, perhaps because of my private equity background. We ask, What are the quantitative and qualitative risks associated with an investment?” The key element, especially in qualitative risk, is acknowledging risk. Once you acknowledge it, you can start to factor it in, even if you can't exactly quantify it. To be clear, we think risk is best measured over the long term and our model is very much long-term oriented. That’s how we've built the foundation of our model, and from there built our portfolio.

With regard to investment areas, we don't think along the lines of strict asset classes; rather, we talk about investment strategies. People talk about this asset class or that asset class. I find it strange when people call venture capital an asset class. I look at it and I say, "If there's no index, there's probably no asset class." Instead, we think about investment strategies. Every investment fits somewhere on the investment continuum in our world. You may or may not like an investment, which is fine, but it fits somewhere on the investment continuum. We divide the continuum into four simple strategies, and every investment fits somewhere in those four simple strategies. It gives us a lot of flexibility to invest with the best managers and opportunities when we see them, and to build a balanced portfolio based on risk analysis.

"I am proud that our team adapted well to the new world we were living in while maintaining high investment standards and supporting each other."

Trusted Insight: In a previous interview with Trusted Insight, you mentioned the importance of people and how they can define success. How has that approach and thought process helped you throughout the years?

Philip Rotner: I always think people are critical to any investment strategy. If you think about the best people you invest with, they're usually incredibly transparent. They're incredibly honest. They know their strengths, they know their weaknesses, and you have good dialogue. That's not everything, but it is a really good start when looking at people. Of course, they have to have the intellectual talent to invest well and have a good strategy. If they're honest, transparent, and have the desire to do well and to serve the people that they're investing for, they'll tell you when things are not going well. They'll tell you when they made a mistake. They'll tell you when they have done well. They'll tell you what their concerns are generally. They do this because they are introspective and striving to perform well. When managers are open, honest, and transparent like that, it helps us make better decisions and gives us much greater insight into our own portfolio. At the end of the day, looking at the people is really critical—it is at the top of the list when we evaluate managers.

People on our team are critical. They have to have the investment skills, the desire to support Boston Children’s mission, and the ability to work well with each other. While this is always true, it was more evident during the past year. I am proud that our team adapted well to the new world we were living in while maintaining high investment standards and supporting each other.

Trusted Insight: What have been some of the challenges or opportunities of investing on behalf of a health system during a global pandemic?

Philip Rotner: There's been a lot of organizations that have suffered, and many of them for different reasons. Early on, on the hospital side, we stopped seeing large numbers of patients because we were preparing for COVID-19 patients. Frankly, people didn't understand the transmission of COVID. Last year around mid-March, people were saying, "You have to close down. You can't do any elective surgeries. Close the doctors' offices. PPE is running in short supply." Everything was in shortage and prices were spiking. Top-line revenue was disappearing while expenses were climbing. The basic translation is that the bottom line on the operating side of the business was not looking strong.

"As a hospital, we maintain some working capital, but this was a shock of a magnitude that we hadn’t seen before. We certainly don't ordinarily plan to sustain 12 months of significant losses."

What does that have to do with investment? Pretty much every hospital went into negative cash flow during that time period. We didn't know how long we were going to be negative. As a hospital, we maintain some working capital, but this was a shock of a magnitude that we hadn’t seen before. We certainly don't ordinarily plan to sustain 12 months of significant losses. The reality is that March, April, and May of 2020 were very tough months from the operating point of view of the hospital, and the investment program had to stand ready to support our mission.

One of the silver linings of the pandemic was to see how technology was changing medicine in real-time. The hospital is at the forefront of research and technology and we regularly expect clinical advances out of our research. This clearly happened, as we know, from the success of Moderna. Also, due to the pandemic, people could not travel or be seen in a physician’s office, so virtual visits started ballooning. Fortunately, the hospital has an innovation team that was already exploring the frontiers of telemedicine and looking to advance it through technology. Virtual medical visits ballooned during the pandemic and Children’s was ready for it. For instance, now you can have virtual visits with patients via Zoom. That is really an incredible change in the way the hospital is doing business. When you look at the absolute volume of the hospital, including the virtual visits, the volume was very high.

Trusted Insight: As an investor, you must be excited about tech disruption. Whats your outlook on collaboration between innovation startups and more traditional health systems?

Philip Rotner: Absolutely. We have an innovation team here. I'm actually only one of three CIOs at Boston Children's Hospital. I'm the chief investment officer, and there's a chief innovation officer and a chief information officer. We actually work closely with the chief innovation officer, Dr. John Brownstein, on digital technologies. We often work together in terms of taking digital technologies developed or enhanced at the hospital and help push them forward, both internally as well as through our investment relationships. You've probably seen John on ABC TV a fair amount. John is an epidemiologist by training and has been sharing his insights on the pandemic throughout the last year. On the biological side, we work closely with our licensing office, led by Irene Abrams, to help support her as she licenses Hospital IP. Working with both John and Irene has led to more collaboration between the investment team and new technologies and startups.

Let me be clear. We did not foresee a pandemic, but three years ago our investment office did a white paper analysis on investing in healthcare. It was a convergence of IT and science. I clearly remember the original mapping of the human genome, and how long and expensive that was. Now you can get a DNA panel done for a couple of hundred bucks in less than a day. That's because of computing power. That convergence of computing power and life science research has created a powerful wave in the health sciences area. That white paper led us to focus more on healthcare investment, and we began to invest a little bit more heavily in the space—including in the venture area.

Trusted Insight: Are there any final thoughts youd like to add?

Philip Rotner: There are so many critical elements to an investment office today. It's important to build the right culture in the office, one that is really mission-driven. We do have a wonderful mission: taking care of kids. We want to make sure that we provide the financial resources to be able to execute on that mission. We've had success in building the right team, including many of us who have now worked together for a long period of time. We have a team that is incredibly deep and talented. Among our four investment directors, three have had CIO in their title before. And the team is broader than the directors, with a strong cadre of people all contributing to our collective success. When you have a deep, talented, stable team that is working well together, it improves your probability of success from an investment return point of view. One of the things I'm proud of is that the team has developed a culture where we've been able to stay together for a long time to produce strong returns. I never want to leave that out, because I think it is really critical to our success.

Ill add that two of the four investment directors are women. The senior part of the team has good gender diversity. About 25% of the investment office is non-white. We did it by hiring the best people. I think that's really important, because we're a global portfolio, and you have to have people who are bringing different thoughts from their life perspectives and experiences. When you bring that to the table, you can have the best program.

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The full list of 2021's Top Health System Chief Investment Officers can be found here