Josh Rabuck is Executive Director and Chief Investment Officer at Indiana University Health. He previously held the role of Director of Absolute Return and Deputy Chief Investment Officer at the state of Indiana’s pension plan. He has a B.A. in Business, General, and Religious Studies from Franklin College.
Josh was recently named to Trusted Insight’s list of the Top 30 Hospital Chief Investment Officers. The following interview has been edited and condensed for clarity.
Trusted Insight: You started out with a B.A. in business, general and religious studies from Franklin College. Can you tell me a little bit about your career path and what first attracted you to working in institutional investing?
Josh Rabuck: My first stint in asset management was working at a wealth management firm that had a particular emphasis on working with commercial airline pilots.
After a few years in wealth management, I wanted a new challenge, so I decided to move to the state of Indiana’s pension plan and manage institutional assets. At the time, the public employees fund and the teachers' fund were two separate entities with assets of $13 billion and $7 billion, respectively. By the time I left in 2011, the two pension plans had merged into a single governing entity called the Indiana Public Retirement System (INPRS). I was a jack of several trades while I was there. I worked on the public equities side to begin with, did some work on risk management, built their first allocation to hedge funds, and also served as the deputy CIO for a time.
Trusted Insight: What attracted you to working for IU Health?
Josh Rabuck: We made some impressive strides at INPRS, so I don't want to diminish that time, but it was an easy decision to join IU Health. There were so many things that brought me over. It was an opportunity to build something great from the ground up.
Also, the healthcare story problem is a bit unique. For starters, our investment office is responsible for a captive insurance pool, the system's balance sheet, defined benefit plans, and defined contribution plans. Each of those individual pools is unique with distinct objectives and asset-liability profiles; however, the real challenge is utilizing all those various pools and putting them together to enhance the overall mission of the organization. This complexity was initially quite a draw, and one that has only made me more intrigued five years into the journey.
Additionally, there's the intrinsic value of the job. We know that our efforts across these capital pools are critical to supporting the mission of an organization that skillfully delivers care to countless Hoosiers. It's humbling and rewarding to play a part in that mission.
Trusted Insight: How did you go about consolidating the capital pools at IU Health?
Josh Rabuck: Before I arrived, IU Health had grown considerably through mergers and expansion. We had just under 20 hospitals throughout the state of Indiana, some of which were doing their own investment and risk management at the local level. The first year of my life at IU Health involved traveling to these different communities throughout the state, engaging with the key stakeholders and boards, and describing how a system-wide asset management approach was the way forward. The rationale was simple to articulate, because the complexities of coordinating such a large system really required an integrated investment management approach.
Trusted Insight: Going forward, how are you looking to develop your investment approach towards those capital pools?
In a world where the supply of capital is high, but there are fewer and fewer opportunities and everyone seems to be doing similar things, we want to add value by getting out in front and thinking about what the next leg of the cycle will look like.
Josh Rabuck: Returns matter, but they don't matter so much that risk management gets short-changed. Our process begins with risk. While we do have a return that we target, we manage risk first. We know that the markets don't necessarily deliver the returns that we expect.
In a challenging market -- for example, late in a cycle (where we believe we are today) -- we are forced to think a little bit differently. In a world where the supply of capital is high, but there are fewer and fewer opportunities and everyone seems to be doing similar things, we want to add value by getting out in front and thinking about what the next leg of the cycle will look like.
This ultimately is probably a boring answer, but entering this part of the market cycle, our focus is less on near term opportunities; rather we're concentrating our efforts to discern what not to own. We’re also making sure that we have allocated capital to managers that are really attuned to managing risk. We expect to see that their investment positioning matches our understanding of their risk management process, and that they have the ability to adapt so that they can move when opportunities arise.
One practical thing that we've been working on is formally expressing different risks that we are willing to take. Right now, we have a small budget for illiquid investments, so we have some unique opportunities there. We also are willing to take machine risk, so some of our hedge fund strategies utilize quantitative methods to implement their strategies. Finally, we're trying to spend more time with existing managers to ensure that we fully understand what we own, and eliminate managers that have moved away from the tenets of our original investment thesis. That tends to mean that we run a fairly concentrated portfolio of managers.
Trusted Insight: You mentioned having a concentrated portfolio of managers; can you tell me a bit more about why you do that?
Josh Rabuck: There are a couple of reasons why we want to keep the manager name-count low. One is we don't want just market returns. We’ve all seen shops where there are 400 line items for, say, a private equity portfolio, which leaves very little room for exceptional performance.
Another reason centers on this idea of creating a culture of conviction. One of the reasons the team does very in-depth analysis of managers, is because they know that we only have so many line items that can be occupied across the portfolio. The team really understands the strategies and really knows what funds are doing. This leads to conviction in the portfolio.
We always try to create a platform of ideas where there is a high competition for capital, so if a manager falls below, say, a 3% portfolio weight, then we have a conversation on whether we intend to allocate more. If the answer is “no,” then there is very likely a loss of confidence in this manager or strategy. We call them our “up or out” conversations. At some point, the manager becomes so diminished in a portfolio that it's probably time to move on. They're not making an impact on the overall program and have become just a line item that we need to monitor. We want managers to have an impact on the portfolio.
Trusted Insight: How do you make investment decisions within the team? Does your governance committee play a role?
Josh Rabuck: We have a fantastic investment committee. We always say that we want them focused on the billion-dollar, strategic decisions like asset allocation and establishing risk parameters, while we'll focus on the million-dollar, and more tactical decisions like manager selection. This works well because in addition to their investment acumen, they also bring a broad perspective on the business of IU Health and the external market in general. They've really played a key part in focusing us on risk management, because of that broad view of the business.
Trusted Insight: How does working on a hospital portfolio compare to a public pension?
In some ways working for a pension is very similar to working for a hospital, and I think this is part of the reason why IU Health wanted somebody with my background focused on asset-liability matching.
Josh Rabuck: In some ways working for a pension is very similar to working for a hospital, and I think this is part of the reason why IU Health wanted somebody with my background focused on asset-liability matching. I approach our capital pools with this asset-liability framework in mind. Sizing risk with IU Health; however, requires somewhat of a different skillset than on the public pension side. One more point I’d make is that there certainly are different inputs that are associated with pension funds and hospitals, but the risk of shortfall, in terms of return objectives, ultimately lead to the same end game – difficult decisions on how to overcome that shortfall, while continuing to manage within appropriate risk parameters.
Trusted Insight: How do you size risk within a hospital?
Josh Rabuck: We talked to our investment committee about the risk framework that we wanted to establish. In collaboration with our finance, insurance and a whole host of other groups within IU Health, we went out and grabbed as many risks as we could find throughout the system. For example, “what happens if certain reimbursement programs are altered” or “if there's a collateral posting requirement, how would that impact our asset pools?” We sized those risks in dollars and put some probabilities around them which created a risk scatterplot.
We then worked through various scenarios that combined many of those risks in order to assess what capital might be required from the investment portfolio. We iterated these scenarios with our investment committee in an effort to develop appropriate tolerances for investment risk in the context of the whole system. The investment committee then established guardrails, and we proposed an asset allocation that operates within those guardrails. It really is a dynamic process, though. IU Health is a living, breathing organism which doesn't stay static. The system is always looking for different opportunities and also reacting to various risks as a result of the changing healthcare environment. We, as an investment office, have to constantly understand the consequences of an evolving ecosystem. It's pretty dynamic, very challenging and I think part of the reason the team loves what they do.
Trusted Insight: What advice would you give to someone that's potentially looking to work for a hospital, given that it's a slightly different environment?
Finally -- and I use this word with the team all the time -- it’s my favorite F-word: “flexibility.”
Josh Rabuck: One is to value excellent communication. I think that this is true for any CIO, but especially true within healthcare. There are many different key stakeholders within a healthcare system with differing views on the industry. Because of this, it is imperative to communicate the key principles used in allocating capital and how the assets of the organization integrate into the mission.
Secondly, let your investment biases surface and expose them as either a helpful or harmful overlay that you bring to the portfolio.
Finally -- and I use this word with the team all the time -- it’s my favorite F-word: “flexibility.” I think that healthcare is so dynamic in terms of dealing with complex and often competing priorities that can also vary in their importance over time, that it requires staff to be very agile as it adapts the portfolio to the needs of the organization. Also, as a practical matter, being flexible in your thinking as you move from one pool to the next in terms of how you're attacking the issues associated with that particular pool is really important.
Trusted Insight: Is there anyone who has influenced your approach to investments?
Josh Rabuck: I've been fortunate to work with some really great people. I’d like to think that I’m pretty good at taking bits and pieces of wisdom from a lot of places, but if I had to single a few out I’d say Shawn Wischmeier and David Cooper.
Shawn Wischmeier, who I worked for when he was chief investment officer at the state of Indiana’s pension plan and is now the chief investment officer at Margaret A. Cargill Philanthropies, is a guy that really values this excellence of communication with stakeholders that I mentioned earlier. He also always has an open door policy to manager and investment sourcing. He had an emphasis on not just hiring an excellent team, but also hiring people who value being a part of the team.
The other person is David Cooper, who was another chief investment officer at the state of Indiana’s pension plan for a period of time, and is now the chief investment officer of Purdue Research Foundation. I would say he's one of the hardest working CIO’s out there. He taught me the value of deep manager research, preparation, humility, and doing what it takes to know what you own. He also taught me to have some fun along the way.
To learn more about the top-tier institutional investors, check out Trusted Insight's list of Top 30 Hospital Chief Investment Officers.