Access here alternative investment news about Exclusive Q&A: David Erickson, Chief Investment Officer, Ascension Investment Management

David Erickson is the chief investment officer at Ascension Investment Management, where he is responsible for the administration, management and coordination of investments and operations. Prior to this, he was chief investment officer at the University of Wisconsin Foundation from 2002 to 2009.

Earlier in his career, he was a vice president and investment strategist for Strong Capital Management in Wisconsin and worked for PNC Bank/PNC Capital Markets in Pennsylvania, Chemical Bank in New York and Firstar Bank in Wisconsin as a derivative specialist. Erickson holds a bachelor’s degree in economics from Wheaton College. He is also a Chartered Financial Analyst.

Mr. Erickson was recently named on Trusted Insight’s ranked list of Top 30 Hospital Chief Investment Officers. He graciously spoke with us on May 16, 2016. The following interview has been condensed and edited for clarity.

Trusted Insight: You started out within investment banking. How did you transition into institutional investing?

David Erickson: I spent about ten years of my career in investment banking, primarily in derivatives trading. Then in 2001, I started to have a family and wanted to move closer to my family in Madison, Wisconsin. However, it was really hard to find a derivative-focused job in that area of the country. I found my way to the University of Wisconsin Foundation as an analyst and ended up spending eight years there. By the time I left, I was the chief investment officer and had really good mentors on the investment committee. It was a really great environment for me to restart my career. 

Trusted Insight: What initially attracted you to institutional investing?

David Erickson: There are a lot of similarities between derivatives trading and institutional investing. Working within derivatives was a good education because you had to know the markets. We mostly traded in fixed-income and equity derivatives, but credit derivatives were also starting to come into play. It was a multi-asset class discussion. I like thinking about markets; you're always trying to think about if equity is going up or down, where interest rates are going to go, or whether you should do interest rate swaps or not. So when I interviewed for the position at the University of Wisconsin, there were a lot of topics that I could talk about.

Secondly, derivatives were being used more in institutional portfolios at that time, so having a background in derivatives was helpful in considering whether to hedge exposure or not. The idea of synthetic exposure was starting to become more and more in favor. That was a differentiator for me in my career at the University of Wisconsin as we started to think about those things, rather than just hiring managers. That helped me in the interview and my position. We did a few things that were helpful for the portfolio; for instance, we hedged a certain exposure perfectly before 2008.

Overall, my interest had been a combination of economics and mathematics, which has been fulfilled by both derivatives and institutional investing. In hindsight, it was a more natural fit than I could have ever planned, but it makes sense as I trace through how one thing led to the other.

Trusted Insight: How did you go about hedging your exposure at University of Wisconsin in 2008?

There have also been some similarities to 2006 and 2007. We have been asking ourselves, 'Where do things look inexpensive that we can overweight? Where is there value?'

David Erickson: Around 2006 and 2007, like a lot of people, we were getting very nervous about the housing market. In terms of returns, we felt we were getting rewarded for risk that was getting toward the eighth or ninth inning, so we started to look at ways of hedging credit risks.  Ultimately, we decided to hedge investment grade credit risk. Our thesis was that if there was a collapse, all credit markets would be impaired. Purchasing “insurance” in investment grade credit markets was still cheap in 2007, and we began to move in that direction.

We put a short credit hedge in the endowment, and it worked great. We put it on around mid-2007, which was maybe the best time to do so. We did not carry it all the way through to March 2009, unfortunately, but we still got a pretty good benefit from it. Of course, we had difficult returns in 2008 like everyone else, but hedging on the edges did help us on a relative basis. My background in derivatives helped me to start asking questions, such as “if we can't do it through a manager, could we do it synthetically? And how would we execute that?” It was a good experience for me to go through that.

I also have to give credit to my investment committee at the University of Wisconsin. I had a number of really good investors there, who were constantly pushing and asking questions like: "If we think things are expensive, why aren't we going to cash?” or “Why aren't we hedging our exposure?" I was always being challenged by that group, and it was a great education for me.

Trusted Insight: There have been some cracks in Q4 2015 and Q1 2016, and some investors are a little hesitant. How do you feel the 2008 market compares to the current market?

David Erickson: I compare the market today to two different environments. In some ways, 2015 felt like 1999 in that tech stocks have done much better than the rest of the market. We talked a lot at Ascension Investment Management and also with our institutional clients about the idea that if you're a value investor, you really have not been rewarded in the last couple of years, how long should you hold that conviction? Over time, value investing does matter. There's been some real close similarities to 1999. 

There have also been some similarities to 2006 and 2007. We have been asking ourselves, "Where do things look inexpensive that we can overweight? Where is there value?" If there's an area we think is expensive, then we want to re-balance. It's a struggle to find where we want to put the money to overweight as an offset to an underweight because everything seems to be fairly priced or on the expensive side. That is creating some challenges. For us, we're not adding risk beyond where our target risks should be. At the same time, we can't be underweight risk, because there may be a month or two where the Federal Reserve decides to be more aggressive on monetary policy, for instance, and the market rallies really quickly. We've been very neutral across the board trying to pick good managers and deals and be more specific in our investment choices as opposed to just relying on markets.

I think there's a nervousness underlying this. We're getting to the end of how much central bank activity can prop up the market, and so we ask ourselves everyday what the next environment will look like. Will it rebound and get healthier, or will it bounce around zero for a while? Or could this ultimately crack?

Trusted Insight: In terms of mitigating those market factors by picking good managers and deals, what do you look for?

David Erickson: From the beginning, we set up our recommended asset allocation to be diversified across economic regimes. We were very deliberate in wanting to have investments that are targeted to do well in growth environments, inflationary environments and deflationary environments. We're very tactical in trying to over and underweight firstly across those economic regimes and secondly by what’s attractive in terms of asset class within that. Our assets under management are not equally weighted across those economic regimes, as our institutional clients all have different weights. We're trying to stay relatively neutral across our targets until we get more information, because we don’t know if the next environment is going to be inflationary or deflationary.

We also spend a lot of time trying to identify managers that have done relatively well over the past 18 to 24 months. We have more confidence in those who can navigate this pretty volatile environment, where returns have ultimately been close to zero, as opposed to someone who may have a great ten-year track record. The recent record is more relevant to me right now, because we could see this volatility for a number of years ahead, and I want to have managers that do well in that environment.

Trusted Insight: When you arrived at Ascension Health, you were the first person within the investment office. How did you build up the investment office and what challenges did you have to overcome along the way?

David Erickson: When I joined Ascension Health in 2009, the idea was to build up the investment team staff. My first two hires were former CIOs at other university endowments. It wasn't necessarily planned this way, but they had a real passion in a particular asset class. I talked to them about coming to Ascension with me and being more of a CIO within an asset class and focusing their time on that. Then I could shield them from other things that happen in a CIO's day-to-day job, such as reporting to clients and back office legal work. I said, "If I can support you on that, you can be really dedicated to giving best idea portfolios -- would you be interested in doing that?"

From there we started to build out one-by-one. One of things that has turned out really great is that whenever we decided we were going to add a position, either through a recommendation or a contact I had, someone expressed interest, and they would be really great for the position. We're up to 27 people on our staff now, including investments, operations and legal/compliance. We even hired a client relationship person to serve the clients we’ve added over the years. Across the board, we have had people that we just found, and it was one interview. We didn't have to search very long. I've been very fortunate in building up the staff.

Today, the staff we have are really excellent. I admire everyone on our staff. They're admired by our peers, as well. We get along really great. We focus really hard on having a good culture that we enjoy working with each other. I think, there's a number of us that would not be disappointed if we had to hang out together on a Saturday, as opposed to escaping from each other on Friday. We have a very collegial group that I'm really proud of.

We've had a few people leave for other opportunities. I think that’s a sign that we're doing things right -- other people are interested in our people. We continue to find people that are interested in us. I think our reputation now has been helped by my staff. They're out and about and get to meet people. We're in much better position to hire today than we were back then.

Trusted Insight: You’ve hired a number of your investment team from university endowments. How does working for a hospital compare?

In the running of a hospital system, you often have a significant amount of debt to manage as well. Thinking about the assets and liabilities for these clients is a lot more complicated than at an endowment where you have a spending rate.

David Erickson: It's really different. With an endowment you have one pool of capital and there are a number of funds underneath that are for endowed gifts, chairs, scholarships and what have you, but really you're investing one pool. With the hospital, there are multiple pools of capital. For our clients, we manage operating funds, the assets of defined benefit pension plans, defined contribution pension plans, insurance trusts and a number of foundations, all of which are distinct portfolios.

In the running of a hospital system, you often have a significant amount of debt to manage as well. Thinking about the assets and liabilities for these clients is a lot more complicated than at an endowment where you have a spending rate. In an endowment, once you understand that spending rate, you can work on the asset side of that pretty easily. At a hospital system, it's a constant changing picture. There are capital projects that may go or not go and acquisitions that can happen. It's a much more complicated institutional investor than a foundation or endowment.

At the end of the day, what we try to focus on is building portfolios for each of the different clients whose assets we manage. That's the objective shared by me and Ascension Investment Management’s risk management group.

Trusted Insight: It has been a challenging year for many hospital systems. How do you think investing within hospital systems is evolving?

David Erickson: I think we all recognize that a hospital system’s investments are very important to support the system’s continued operation and growth. Therefore, there are a lot more hospital systems who are creating their own investment teams or outsourcing to those who can help them achieve their objectives. We are also seeing a lot more healthcare people attending conferences. The healthcare-only investor groups that I've been a part of contain some of the best investors that I know. They are becoming more sophisticated all the time. These groups are typically very collaborative - very open to sharing reference calls, getting together to talk through markets and conferences are often open book. At the end of the day, trying to earn a return for the amount of risk each portfolio wants to have is a difficult question no matter what type of portfolio you're investing for, so healthcare investors are all trying to figure that out.

Trusted Insight: So networks are important within hospital investing?

David Erickson: Yes. It might be because I am involved in more groups here than I was at the University of Wisconsin, but in the groups that I am a part of, if someone has a question, then we try to be pretty quick to respond to surveys and thoughts on best practices. It might be a question that I want to ask or it might be a question that I know I can just help answer. One of the groups I belong to has a couple of conferences with open-ended roundtable discussions and people are very open to sharing thoughts and ideas and asking questions. Everyone is very collaborative, sharing their experiences, whether good or bad. It doesn't feel competitive. We all want our healthcare systems to do well, so there is no reason for us to compete. It's a very collaborative group.

Trusted Insight: You have also established Ascension Investment Management to help some of those other institutions to invest without relying on external consultants. How does that function?

David Erickson: We felt that if we were to unitize a number of our asset classes, we might be able to help other similarly situated investors gain access to high-quality managers and reduce the fees and expenses associated with investing. Our Catholic Socially Responsible Investing (SRI) guidelines are really important for us, and we apply them to all our asset classes. That's unusual. When we decided to register with the SEC in 2012, we knew that if we set it up correctly we would be able to offer a number of different asset classes to Catholic-based institutional investors who want to diversify, but want to apply Catholic SRI guidelines.

Ascension Investment Management registered as investment adviser so that we could offer our investment management expertise and access to independent money managers to selected institutional investors. The investors don't have to be Catholic necessarily, but because our Catholic Socially Responsible Investing guidelines apply to all the assets we manage, it would make most sense for our clients to be religious-based. We have a number of other Catholic healthcare foundations and religious orders that invest with us. The business has been growing, which is great, and I enjoy doing it as well. I feel we can do a very good job for our clients because we offer ways to reduce their investment fees and expenses, diversify their portfolio and get them access to good managers. The clients that we're working with are doing great work, and if we can support them by providing high-quality investment management services, that feels great for me. One of the challenges is that every client has different needs. It means a few more meetings for me, but it is certainly worth the effort.

Trusted Insight: Socially responsible investing is still fairly unique within the investment world and has its own special set of challenges. How you approach socially responsible investing?

David Erickson: Our investment guidelines are based on teachings of the Catholic Church. Every Catholic institutional investor’s guidelines are a little bit different. Like many Catholic institutional investors, Ascension Investment Management’s SRI guidelines are based on the U. S. Council of Catholic Bishops investment guidelines, but there might be differences in various revenue thresholds. Tobacco is a good example; Ascension Investment Management will not permit investments in a company that has more than 20% of its revenue in tobacco. Some other Catholic institutions might have a revenue threshold of 15%, others 30%. Generally, it’s very close though. We have a number of restrictions like that in the way we set up our SRI guidelines. We'll say, "Certain industries, if their revenue is coming from certain things that we think violate the teachings of the Catholic Church, we do not invest in those."

Once we establish those guidelines, we can go through the list of public companies across the world, including emerging market countries. We don't just stop at the United States. We try to establish that list across the globe. We start with a restricted list of over 800 companies. As part of our guidelines, we have a philosophy section where we try to capture things that aren’t necessarily in black and white. There are a lot of times where we'll come across a situation not captured in the specific guidelines, but it definitely would not be something that we think would promote Catholic teachings. For instance, it might be predatory lending, or it might be environmental, or it might be a social impact on how they're treating their workers. It's hard to put a rule-based analysis on those companies in a lot of those cases. If there's a question about a name in our portfolio, we work with a Catholic ethicist to determine if we think that's a company that should be sold or if it can stay in the portfolio. 

This is work we're doing every month. Every quarter there seems to be an issue where it's not black and white. It's something we want to have a discussion about. We make sure that we discuss these issues with all of our affected clients and how we resolved it. Considerable effort goes into this process. At the end of the day, you have a portfolio that is really avoiding anything we think violates the teachings of the Catholic Church. At Ascension Investment Management, we have our investment people review the portfolio and look at the names. We think the combination of having a restricted list and then applying an overarching philosophy can help us cover those grey areas and takes us as close as we can be.

While the SRI guidelines negatively screen things out, we also like to be proactive in supporting the teachings of the Catholic Church as well. One way to do that is through “impact investing,” which is a phrase that seems to be pretty popular right now. We're trying to identify other investments that not only have a good financial return, but also promote a social good. We've identified that as a company or project that either supports the world's poor and vulnerable or is promoting good stewardship of our environment. Those two categories cover lots of things. The environment might be clean energy, clean water and those types of things. The poor and vulnerable might be food, education, healthcare, etc. Through that combination of restricting investment in things that violate the teachings of the Catholic Church and investing in things that promote the teachings of the Catholic Church, we think that we are trying to use our money as best as we can. That’s not just by doing the underlying mission the clients often have, but within the dollars themselves -- we can be proud of how they’re invested and that they can be doing good at the same time.

Trusted Insight: What would be one piece of advice you would give to someone who is looking to build their own career within institutional investing and maybe one day become CIO?

David Erickson: Be well read. I'm reading a book right now called "Antifragile: Things That Gain From Disorder" by Nassim Nicholas Taleb. The book talks about how if you're a fragile person or industry as you go through volatility, it makes you weaker. If you're an antifragile person or industry and you go through volatility, it makes you stronger. I think that on the investment side, you have to be ready to go through up periods and down periods. You're never always going to be right. If you're able to develop a team, a psyche and a process, then having that mind-set with your group as you go through volatility doesn't shake your conviction, it actually makes you stronger. I think that's really important. In hindsight, 2008 and 2009 were really rough periods to go through, and I think the lessons I learned then made me a better investor. So I would recommend reading that book and then discussing it with someone who has gone through volatility on the job to get an understanding of that. You're going to go through volatility in your career, and managing that while also making yourself stronger is important.

Trusted Insight: So it takes a bit of resilience to be a CIO?

David Erickson: I think so. You're getting me at the moment where being resilient is more key than managing your success. It's been a rough market. It's been difficult to navigate through the last couple years. There's work that we're doing now that I think will benefit our clients in the future. Even if we're not seeing all the fruits of that labor today, I think we'll see that in the future.

Trusted Insight: Outside of investments, what really gets you out of bed in the mornings?

David Erickson: We support a lot of people in non-profit healthcare and foundations through the work that we do here. To support that work is more than enough, but there's a few fun things I try to do on the side. I enjoy spending time with my three kids as much as possible. As they’re getting older, we’re starting to travel one-on-one together. We'll pick a city and go explore. That has been a ton of fun. Our latest interest is room escapes, where you have to solve puzzles within an hour to get out of a locked room. We discovered one on a city trip, and absolutely loved it, so we have been doing them one by one ever since. I am also a huge Green Bay Packers fan. If you come into my office, you'll see Green Bay Packers stuff all over my office. I'm not shy to admit that!

To learn more about family office investing, view the full list of Top 30 Hospital Chief Investment Officers