Scott Pittman joined the Mount Sinai Health System as the Senior Vice President and Chief Investment Officer in December 2008. The investment office is charged with managing the institution’s $1.7 billion endowment and long-term capital. The office also supports the oversight on about $5 billion of insurance-related assets. Pittman serves as the chairman of the FOJP Investment Committee and also serves on the Investment Committee for Healthfirst.
Prior to joining Mount Sinai, Pittman was the Director of Investments at Baylor University. He was also an instructor in the Hankamer School of Business and taught Baylor’s Portfolio Practicum course, where students actively managed a $6.5 million investment portfolio. Before joining the investment office, Pittman taught corporate finance and economics at Baylor and also spent time working in healthcare finance and insurance.
Unlike many institutional investment offices, Mount Sinai doesn't construct its portfolio around traditional asset classes such as private equity and hedge funds. In this interview, Pittman discusses how he built Mount Sinai’s portfolio and the thinking behind it.
Mr. Pittman was recently named on Trusted Insight’s Top 30 Hospital Investment Officers. He graciously spoke with us on February 1.
Trusted Insight: Tell me about your job at Mount Sinai and the investment pool you manage.
Scott Pittman: Our day-to-day purpose is managing the investment pool which includes endowed and unrestricted funds. The capital is tied to budget and spending that supports important functions like research within the medical school. The investment pool is truly strategic long-term capital.
Aside from the investment pool, the office supports needs as it relates to the broader institution. This may include insurance and re-insurance assets, strategic organizational initiatives, employee benefits and giving needs.
Trusted Insight: How is your investment team structured?
Scott Pittman: There are four people on the investment team as well as two individuals who support investment operations. In addition, we have in-house legal that supports our efforts.
Trusted Insight: That seems a small team. How are the responsibilities divided?
Scott Pittman: The size of our team is closely tied to the resource needs driven by our investment approach and portfolio construction. Many endowments and foundations approach staffing based on AUM - the bigger the AUM, the bigger the staff. The level of AUM may reflect greater complexity, but AUM is not the driver of staffing needs for us. Rather, the number of investment positions within the portfolio and ability to source new ideas determines our staffing needs. Hypothetically, if you had one position that comprise your entire portfolio, you wouldn't need a team of five people. If you have over 100 positions in your portfolio, you actually need a lot more people. The AUM is less the issue, although different levels of AUM certainly influence aspects of portfolio construction. We've tried to create a balance between the portfolio we own and our staffing, and since we have a more concentrated portfolio, the staffing needs are less.
I find that I can have a very good understanding of eight to ten positions (manager relationships) and still have enough bandwidth to look at new opportunities. If you are monitoring 15 manager relationships, it’s likely that you being forced into a trade-off of understanding what you own versus researching potential opportunities. Everyone is limited by their time. We have about 35 manager relationships that comprise our portfolio, and our top 25 manager positions comprise about 85 percent of the portfolio. As such, we don’t need an enormous staff.
We do not have a hedge fund allocation or a private equity allocation. These are not asset categories but types of legal vehicles with various terms and liquidity.
Trusted Insight: What is your asset allocation strategy? Is there any types of asset you favor in particular?
Scott Pittman: We favor active management and an opportunistic mindset. Position sizing reflects investment conviction. We maintain portfolio diversification and look to add value through manager selection and appropriately sizing what we believe to be the best opportunities. Although much of our portfolio would fall under the category of alternatives, our asset allocation is not built around traditional categories. We do not have a hedge fund allocation or a private equity allocation. These are not asset categories but types of legal vehicles with various terms and liquidity. Portfolio risk factors like liquidity are closely monitored at the portfolio level but do not receive their own allocation sleeve. For example, we have an Equity Focused allocation where long only equity, emerging markets, activist equity, hedged equity, event equities, private equity and venture all compete for capital. After determining our risk preference and equity allocation, we focus on the implementation. We evaluate relative opportunities and portfolio fit. Are opportunities more interesting outside the U.S.? Are specific strategies or sectors interesting? Do we prefer a long-only or trading-oriented approach? Are control-oriented opportunities more interesting in public or private markets?
As mentioned, our investment conviction is reflected in position sizing. However, the use of the word “concentrated” can be misleading as each underlying manager is still diversified. The reality is that an endowment and foundation portfolio with 75 to 100 positions is likely re-creating market betas with active management fees. In addition, we find that a portfolio with fewer positions allows us to build a better understanding of what we own and provides a better understanding of risk.
Trusted Insight: What is the target rate of return of your endowment fund?
Scott Pittman: The short answer is a 7 percent return. Our spending rate is 4.5 percent, and if one assumes 2.5 percent inflation, we should be targeting 7 percent.
However, the discussion is always more complicated as institutional risk preference, organizational needs, investment environment and opportunity set are taken into consideration. Our investment approach does explicitly reflect a risk-adjusted mindset where certainty of return matters - not to take away from absolute returns. It’s a balance.
Trusted Insight: Is your strategy typical in the health care industry?
Scott Pittman: No, actually. I'd say it's fairly atypical in that the portfolio is highly concentrated with a lot of exposure in hedge funds and some in private investments. There is a high amount of active risk that can look very different from other institutions, and our portfolio risk is different. If you look at our equity beta, volatility, expected max drawdown, and illiquidity, these factors are much lower than the average endowment, foundation, and health care entity.
Our goal has been to generate above average returns with less risk, not an easy task in a market that has favored risk. During the bull market of the last seven years, we’ve been able to achieve near top quartile returns with considerably less risk, nearly half the risk by several measures, while achieving top quartile returns over longer time periods.
Trusted Insight: You have a close tie to Baylor University. You taught finance and economic courses at the university and previously helped manage the university's endowment. How have the two investment jobs differed?
Scott Pittman: The jobs are very similar in many ways as you’re evaluating the same opportunity set to construct a thoughtful portfolio that supports the strategic needs of the institution. The same issues are present as it relates to governance, a sound investment process, resource needs, effective communication, and research quality. That said, the institutional needs and preferences, competitive advantages, and the resources can be very different. There are elements of good governance practices that should be present in any institution, but the structure of governance can differ. The market environment is always changing and creates new challenges.
Moving from a university endowment to health care was very similar in many regards, but the focus had to be on how the governance, incentives, investment process and resources, are specifically applied to Mount Sinai. Our investment office has worked to customize our efforts to Mount Sinai’s strengths and needs. We believe it’s important to create a true partnership with our Investment Committee and look for ways to use our skills to support the institution, even outside our specific mandate.
Trusted Insight: What are the main challenges facing hospital investors in current environment?
Scott Pittman: The challenges are the same for most all investment offices, regardless if they are hospitals or not -- valuations are not that attractive; markets are crowded; and volatility is artificially low.
Last year is a great example. We had volatility and big dislocations in January and February, but by March 31, the first quarter looked calm. The S&P was up 1.4 percent in the first three months of 2016 but was down -6.6 percent on February 29. You had these bouts of volatility, but from point to point, the volatility was muted.
Current valuations and crowded markets make for an environment to be cautious in taking risk. Markets like the U.S. and assets like private equity have been expensive or arguably overvalued for some time. However, these areas have also continued to be the best performing. That’s not to say that some private equity is not going to do well going forward, but money continues to flood into private equity while dry powder is at all-time highs. I think there’s going to be some disappointment, especially for investors less selective.
We are always concerned about markets but even more so today. We are taking risk, although we remain extra cautious and aware of the opportunity costs. Our focus is a bit more heightened to certainty of returns. The team culture is as critical as ever, and I believe will be a defining factor in our future success – how we collectively work to find the best ideas, patience and investment discipline, ability to question one another and our own biases, and ownership of outcomes.
To learn more about health care investing, click here to view the complete list of 2017 Top 30 Hospital Investment Officers. You can view our full catalogue of interviews with institutional investors here.