Laura Kernaghan is an investments manager at Ann & Robert H. Lurie Children's Hospital of Chicago. Prior to this, she was an equity analyst at Essex Investment Management and an equity analyst at The Burridge Group. She has an MBA in accounting and finance from The University of Chicago Booth School of Business and a B.A. in economics from Loyola University in Chicago.
Ann & Robert H. Hospital has a very small investment staff dedicated to the management of the hospital’s endowment and pension assets totaling more than $1 billion. In this interview, Kernaghan shared her insights on the asset classes she invests in, lessons learned from the 2008 crisis and how she manages a diverse asset pool with small staff resources.
Ms. Kernaghan was recently named on Trusted Insight’s Top 30 Hospital Investment Office Rising Stars. She graciously spoke with us on September 29, 2016. The following interview has been edited for clarity.
Trusted Insight: Before you started at Lurie Children’s Hospital, you had a number of roles as an investment analyst spanning ten years, which is quite a long time. How has that helped you in your current role as an investment manager?
Laura Kernaghan: There were many skills that I developed as an equity analyst that translate well into the role of managing a pool of funds for a hospital or endowment. The due diligence process that I used as an equity analyst is not terribly different from what I do for manager due diligence in my current role. In both of those roles, one looks to develop a thesis and to find information that either supports or disproves that thesis. I am, however, applying this process to two different things: individual securities as an equity analyst, and asset managers in my current role.
Trusted Insight: What initially appealed to you to work in a hospital and move away from your role as an equity analyst?
Laura Kernaghan: This role provided an attractive opportunity to take the skills I had developed in my earlier career and apply them to an extraordinarily meaningful mission: I’m supporting an organization that makes an important impact on people's lives.
Trusted Insight: Tell me about your investments. How do you manage a number of different pools?
Laura Kernaghan: We manage them all within the same structure. All of our decisions are made with our all-volunteer investment committee and the assistance of an outside consultant.
Our internal investment team focuses on three pools: our endowment and long-term asset pool, which is around $950 million, a defined benefit pension plan of around $160 million, and our defined contribution plans.
Trusted Insight: There has been a lot of people looking into transitioning from the defined benefits (DB) plans to the defined contribution (DC) plans. How are you managing that?
Laura Kernaghan: We are well along that path of shifting the emphasis on our retirement benefits from DB to DC. From an investment management perspective, recently transitioned to a liability-driven investing program within the pension. We think it is a good step for us to manage the risk on that pool of assets. Then, from the benefits' perspective, as an organization we have taken specific steps to encourage retirement readiness for our employees in the context of de-emphasizing the DB plan within our suite of benefits. We haven't made significant changes as far as the investment lineup goes, but think we have an offering that allows our employees to achieve their objectives.
Trusted Insight: You mentioned endowment assets as well. Can you tell me a little bit about the approach you take to the endowment investments? Do you follow the early endowment approach, or do you take a slightly different tangent to that?
Laura Kernaghan: No. I think that our approach is slightly different and it has also evolved over time. We have a focus on risk-adjusted returns and we try to keep our return expectations within the context our tolerance for loss in a dramatic market event.
We learned many lessons during the financial crisis, and we've made an effort to understand how our portfolio could perform in another financial crisis. Generally speaking, we look to appropriately balance the need to generate returns with the need to maintain a stable source of funds, in order to support our spend rate and the overall mission of the organization.
Trusted Insight: Can you give me a bit of details of the lessons learned from the last financial crisis?
Laura Kernaghan: One lesson is to make sure we feel comfortable with the way our portfolio is positioned, and to use stress-testing to understand what would happen in a negative event. From a more operational perspective. we've aimed maintain consistency of our spend rate on a year-to-year basis that allows us, even in times of low returns, to maintain spending.
Trusted Insight: Within a big portfolio like this, what's your approach to investing within alternative assets?
Laura Kernaghan: Our current portfolio is weighted about 45% in alternative assets. At the moment, the primary emphasis within that alternative portfolio is on direct investments with hedge funds.
Over the past several years, we have increased the allocation to alternative assets. We've also put an increasing emphasis on private equity vehicles, which historically was a very small portion of our portfolio.
Trusted Insight: You mentioned that they largest portion of that was in hedge funds. They’ve been getting a lot of stick recently for low returns. Do you feel the hedge funds still offer value for money?
Laura Kernaghan: We do, but there is indeed a greater focus on that value proposition, and we’re looking for their performance to hopefully rebound in an environment in which they are better positioned to perform. Increased volatility and decreased correlation in the market may lead to more favorable returns.
Trusted Insight: Moving on from asset classes, can you tell me a little bit about your team and how it's structured?
Laura Kernaghan: I am the sole dedicated investments staff; our treasurer and our CFO also spend a portion of their time on investments. We are an extraordinarily small team and work to be as efficient as possible.
Trusted Insight: What are some of the challenges and opportunities you find of being a one-man band?
Laura Kernaghan: I think that both are endless. We have put additional structure around my role and the way we approach to our investments. That's allowed us to operate with greater efficiency and focus on the things that matter most for our portfolio.
Trusted Insight: How do you go about selecting the managers within that relationship? Are there any particular traits that you look for?
Laura Kernaghan: Because of our small staff we rely on our consultant for manager selection.
Trusted Insight: Is there anyone that you look up to within your career who's helped you a lot in developing your investment philosophy or approach to investing?
Laura Kernaghan: In my prior role, my portfolio manager was a fantastic mentor, and here at Lurie Children’s, our Treasurer has been incredibly helpful in my personal development.
Trusted Insight: If you were to give any advice to someone looking to develop a career within the institution of investment, what would that be?
Laura Kernaghan: I think what has been most beneficial for me was to learn as much as I could early in my career. The CFA program and my MBA program have both proven very helpful, particularly when my career shifted directions. I would not have predicted that I would be in this role 10 years ago, but I'm very happy to be here now.
Trusted Insight: Did you have another idea for how your career would have developed 10 years ago?
Laura Kernaghan: I thought I would have stayed as an equity analyst for a number of years and hopefully worked up to a portfolio management role.
Trusted Insight: For my last question, I'm going to ask you one that's outside of investing. What are you really passionate about? What really gets you out of bed in the morning?
Laura Kernaghan: My family is my highest priority in my personal life; my job here helps support my family and in a small way, also positively shapes the world in which they are growing up.
To learn more about hospital investing, click here to view the complete list of Top 30 Hospital Investment Office Rising Stars.