Since October 2012, Chris Halaska has served as senior vice president and chief investment officer at Memorial Hermann Health System in Houston, Texas. Prior to joining Memorial Hermann, Halaska worked in JPMorgan's investment banking division for more than 12 years. Halaska holds a B.B.A. in Finance and an MBA from the University of Texas at Austin.
Mr. Halaska was recently named to Trusted Insight’s ranked list of the Top 30 Hospital Chief Investment Officers. He graciously spoke with Trusted Insight on May 4, 2016 about the increasing importance of the investment portfolio at healthcare systems and the evolution of Memorial Hermann’s portfolio from a balance sheet burden to a long-term endowment-style portfolio.
Trusted Insight: As hospitals’ balance sheets have grown over the past decade or so, the attention and focus of how that money is invested has increased dramatically. What role does your investment function play in the Memorial Herman system, and how have you structured the portfolio achieve that goal?
Chris Halaska: Before I got here we had a portfolio that was a drag on the balance sheet. With that allocation, the expected return was only about 3% or 3.5%, while our cost of debt was north of 5%. The balance sheet was getting drained by this capital deficit, if you will, between what the investments were expected to earn versus what we know we're paying on our debt. We reengineered that to lower the cost of our debt structure through various strategies and optimize the investments; the asset side of the balance sheet.
So as we look forward, our objective is to earn our cost of debt, which is about 5% plus inflation. More of an endowment/long-term view on the world in terms of what we're trying to earn with the portfolio. With that, theoretically, we then have a capital surplus of several percentage points a year on the balance sheet over full market cycles. Our long-term investment pool is about $2.5 billion, but when you throw in some other pools of capital, we're managing over $3 billion. We now use it as a support to the organization for capital projects and credit-worthiness, whereas before it was draining the organization.
Trusted Insight: As an industry, what role do you see investment offices playing at hospital systems throughout the United States over the next few decades?
Chris Halaska: They're emerging. There's a lot of money that has been created at these health care organizations through consolidation and through growth that wasn't there a long time ago.
You're going to see an increasing level of sophistication in investment personnel and sophistication of the boards and investment committees that govern the investments.
Trusted Insight: What did the portfolio look like when you took over, and how has it evolved since?
Chris Halaska: When I took over, it was 85% cash and fixed income. We are now almost the exact inverse of that, with 23% cash and fixed income. Because of the legacy allocation, we had a clean slate, drew up a new IPS, new investment committee charter and re-engineered a more modern endowment-style asset allocation.
We use risk factoring framework in terms of how we think about asset classes versus the more traditional cash, fixed income, equities, alternatives. So for example, hedge funds are not in the alternatives bucket. They go in either the “growth” allocation or “capital preservation” allocation, depending on how they perform under different economic environments.
So the current allocations have approximately 40% in capital preservation-style investments, 40% in growth and 20% in real return strategies.
Trusted Insight: What do you look for in an investment manager? Many professionals we’ve talked to use the same keywords: niche strategies, good team, repeatable process. Are there criteria outside of the norm you focus on?
Chris Halaska: As you describe, it’s the people, the processes and the performance, right? Repeatable process is the biggest thing. Obviously you wouldn't be talking to them if they didn't have a good track record. You try to understand their investment process and assess their ability to repeat on that investment process that has lead them be successful in the past. We do believe that smaller, niche strategies have a better chance for outperformance than the larger asset-gathering firms.
Trusted Insight: Who do you consider your peers within the industry?
Chris Halaska: We look at lots of different types of peers. We look at similar-sized health care systems. Both in AUM as well as just in revenue, presence and complexity of the organization. Large systems who have a few billion in AUM are the folks we look at in health care. Then across investing we look at how some of the folks in public pension plans are doing, what are endowments doing, what are foundations doing? When we get outside of healthcare, it's easy to find a lot of endowments and foundations that are similar sized AUM. Not as easy to find a lot of public pensions at $3 billion AUM. Most of them have many multiples of that.
Trusted Insight: What makes you unique in comparison to any of those peer groups?
Chris Halaska: What's unique about us depends on which peer group. Within healthcare, I think there is a group of us whose organizations have made the investment portfolio a priority. So compared to those similar organizations, we are probably pretty similar.
When you compare us to endowments, foundations and pensions, we're very different in that we have to manage not only a long-term pool of capital (like an endowment or foundation), but also have several other pools of capital that we oversee. For example, in addition to our long-term investment portfolio, we also have both a defined benefit and defined contribution assets. Further, many of us also have to manage insurance plan assets (both onshore health plans and offshore insurance captive assets).
Trusted Insight: What long-term trends have you identified within the hospital industry that's defining how you invest?
Chris Halaska: We are trying to get our organization and help others get their organizations within health care to have a longer term view on the investment portfolios. Historically health care systems haven't been very accepting of illiquid investments, but I think that's changing.
Trusted Insight: You were in investment banking at JP Morgan for more than 12 years before coming to Memorial Hermann. Tell me about your transition into the hospital space from i-banking.
Chris Halaska: When I was in banking, I worked with health care systems from around the country -- capital raising, strategic engagements, M&A, et cetera for hospital systems. Through that I got to know many different CEOs and CFOs of hospital systems. One of my clients became the CFO for Memorial Hermann. They asked if I'd be interested in coming on board and heading up the treasury function, which includes investments obviously, and that's basically how I ended up here. That's the short version.
Trusted Insight: You have a four-person team, not including yourself. Tell me how that team is structured and why?
Chris Halaska: We have been growing it deliberately over the past four years. On the team we have experience with privates and hedge funds, as well as operations. All of us participate in the due diligence processes across asset classes because there are only five of us.
Trusted Insight: What advice would you give to the next generation just entering institutional investing?
Chris Halaska: Funny, I don’t think of myself as being old enough to be passing along advice to another generation yet. But the main thing I would encourage others in is don't be scared to be a little different, and try to be patient.
To learn more about the the Top 30 Hospital Chief Investment Officers, click here.
Mr. Halaska was recently named to Trusted Insight’s ranked list of the Top 30 Hospital Chief Investment Officers. He graciously spoke with Trusted Insight on May 4, 2016 about the increasing importance of the investment portfolio at healthcare systems and the evolution of Memorial Hermann’s portfolio from a balance sheet burden to a long-term endowment-style portfolio.
Trusted Insight: As hospitals’ balance sheets have grown over the past decade or so, the attention and focus of how that money is invested has increased dramatically. What role does your investment function play in the Memorial Herman system, and how have you structured the portfolio achieve that goal?
Chris Halaska: Before I got here we had a portfolio that was a drag on the balance sheet. With that allocation, the expected return was only about 3% or 3.5%, while our cost of debt was north of 5%. The balance sheet was getting drained by this capital deficit, if you will, between what the investments were expected to earn versus what we know we're paying on our debt. We reengineered that to lower the cost of our debt structure through various strategies and optimize the investments; the asset side of the balance sheet.
So as we look forward, our objective is to earn our cost of debt, which is about 5% plus inflation. More of an endowment/long-term view on the world in terms of what we're trying to earn with the portfolio. With that, theoretically, we then have a capital surplus of several percentage points a year on the balance sheet over full market cycles. Our long-term investment pool is about $2.5 billion, but when you throw in some other pools of capital, we're managing over $3 billion. We now use it as a support to the organization for capital projects and credit-worthiness, whereas before it was draining the organization.
Trusted Insight: As an industry, what role do you see investment offices playing at hospital systems throughout the United States over the next few decades?
Chris Halaska: They're emerging. There's a lot of money that has been created at these health care organizations through consolidation and through growth that wasn't there a long time ago.
You're going to see an increasing level of sophistication in investment personnel and sophistication of the boards and investment committees that govern the investments.
Trusted Insight: What did the portfolio look like when you took over, and how has it evolved since?
Chris Halaska: When I took over, it was 85% cash and fixed income. We are now almost the exact inverse of that, with 23% cash and fixed income. Because of the legacy allocation, we had a clean slate, drew up a new IPS, new investment committee charter and re-engineered a more modern endowment-style asset allocation.
We use risk factoring framework in terms of how we think about asset classes versus the more traditional cash, fixed income, equities, alternatives. So for example, hedge funds are not in the alternatives bucket. They go in either the “growth” allocation or “capital preservation” allocation, depending on how they perform under different economic environments.
So the current allocations have approximately 40% in capital preservation-style investments, 40% in growth and 20% in real return strategies.
Trusted Insight: What do you look for in an investment manager? Many professionals we’ve talked to use the same keywords: niche strategies, good team, repeatable process. Are there criteria outside of the norm you focus on?
Chris Halaska: As you describe, it’s the people, the processes and the performance, right? Repeatable process is the biggest thing. Obviously you wouldn't be talking to them if they didn't have a good track record. You try to understand their investment process and assess their ability to repeat on that investment process that has lead them be successful in the past. We do believe that smaller, niche strategies have a better chance for outperformance than the larger asset-gathering firms.
Trusted Insight: Who do you consider your peers within the industry?
Chris Halaska: We look at lots of different types of peers. We look at similar-sized health care systems. Both in AUM as well as just in revenue, presence and complexity of the organization. Large systems who have a few billion in AUM are the folks we look at in health care. Then across investing we look at how some of the folks in public pension plans are doing, what are endowments doing, what are foundations doing? When we get outside of healthcare, it's easy to find a lot of endowments and foundations that are similar sized AUM. Not as easy to find a lot of public pensions at $3 billion AUM. Most of them have many multiples of that.
Trusted Insight: What makes you unique in comparison to any of those peer groups?
Chris Halaska: What's unique about us depends on which peer group. Within healthcare, I think there is a group of us whose organizations have made the investment portfolio a priority. So compared to those similar organizations, we are probably pretty similar.
When you compare us to endowments, foundations and pensions, we're very different in that we have to manage not only a long-term pool of capital (like an endowment or foundation), but also have several other pools of capital that we oversee. For example, in addition to our long-term investment portfolio, we also have both a defined benefit and defined contribution assets. Further, many of us also have to manage insurance plan assets (both onshore health plans and offshore insurance captive assets).
Trusted Insight: What long-term trends have you identified within the hospital industry that's defining how you invest?
Chris Halaska: We are trying to get our organization and help others get their organizations within health care to have a longer term view on the investment portfolios. Historically health care systems haven't been very accepting of illiquid investments, but I think that's changing.
Trusted Insight: You were in investment banking at JP Morgan for more than 12 years before coming to Memorial Hermann. Tell me about your transition into the hospital space from i-banking.
Chris Halaska: When I was in banking, I worked with health care systems from around the country -- capital raising, strategic engagements, M&A, et cetera for hospital systems. Through that I got to know many different CEOs and CFOs of hospital systems. One of my clients became the CFO for Memorial Hermann. They asked if I'd be interested in coming on board and heading up the treasury function, which includes investments obviously, and that's basically how I ended up here. That's the short version.
Trusted Insight: You have a four-person team, not including yourself. Tell me how that team is structured and why?
Chris Halaska: We have been growing it deliberately over the past four years. On the team we have experience with privates and hedge funds, as well as operations. All of us participate in the due diligence processes across asset classes because there are only five of us.
Trusted Insight: What advice would you give to the next generation just entering institutional investing?
Chris Halaska: Funny, I don’t think of myself as being old enough to be passing along advice to another generation yet. But the main thing I would encourage others in is don't be scared to be a little different, and try to be patient.
To learn more about the the Top 30 Hospital Chief Investment Officers, click here.