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Northwell Health's Portfolio Benefitting From Steady Increase To Alternative Assets | Michael Odlum, Senior Vice President | Q&A

by trusted insight posted 7months ago 1247 views
Michael Odlum is senior vice president at Northwell Health, where he has managed the treasury group since September 2011, with oversight of $18 billion in investments across various portfolios, including the corporate, endowment, and pension portfolio, as well as defined contribution plans.

In this interview, he discussed the common expression "days cash on hand" and what it means for Northwell Health and other institutional investors; Northwell's success in increasing allocation to alternative asset classes; and why he believes Northwell had its best year of growth as a health system.

Odlum was named to Trusted Insight's 2021 Top Health System Chief Investment Officers.

Trusted Insight: Tell us about Northwell Health, and what your role there entails.

Michael Odlum: Northwell is the largest health system in New York and it's the largest private employer in the state, with over 76,000 employees and 23 owned and affiliated hospitals. We also have over 830 ambulatory care sites, a world renowned research center, medical and nursing schools and laboratory facilities. And the system has grown significantly over the past decade.

We're also not-for-profit. Our size and scale might make it sound like we're trying to make a big profit, but we're not: we're trying to do the right thing. We strive to deliver high-quality care to the broadest population we can. New York is a very diverse area, probably the most diverse in the United States and perhaps the most diverse in the world. So we spend a lot of time making sure that the highest quality healthcare is delivered equitably. It's a great organization, and I'm very proud to be associated with it.

Trusted Insight: What can you tell us about your team?

Michael Odlum: Our treasury group is an eight-member team. We're all honored to be part of an organization that is so dedicated to its mission.

Our team plays a very important role in that mission, as you would imagine, overseeing assets that total over $9 billion. And that doesn't include the defined contribution (DC) plans, which are another $9 billion. So that’s about $18 billion total assets that we manage, split about one third between the income-generating assets that can deliver investment returns to the health system, with the other two thirds supporting the endowments, pension plans and DC plan investments. That one third or over $6 billion can offer significant support over time for the system, which aims to make just a small profit, a 1-2% margin on the operating side that is important helping us to continue to invest in the mission.
 

"Any health system should have emergency reserves; "days cash on hand" is the common expression. We maintain between $3-4 billion in very liquid assets for that purpose."


Rating agencies are an important factor in how we invest: they say that any health system should have emergency reserves; "days cash on hand" is the common expression. We maintain between $3-4 billion in very liquid assets for that purpose. While those assets are maintained for use in potential emergencies, we still have been able to earn a reasonable investment return over time.

Trusted Insight: A lot of your peer institutions have developed a focus on alternative assets over the last 5 to 10 years, and are increasingly allocating more to alternative assets. Do you have a similar project underway at Northwell?

Michael Odlum: Yes, we do. Not for the general account funds, because those have to be maintained primarily in more liquid investments, but for portfolios, including pension and endowment, where a portion of those assets aren't necessarily needed right away and can be invested for the longer term. In return for that reduced liquidity, we expect to get a premium return over time. We have a long-term allocation target of up to 24% in private equity and private real estate for our pension and endowment portfolios and smaller targets in our other long-term portfolios. This allocation target doesn't include a 5% allocation bucket for private credit. If you add the two together, it's a 29% target for the pension and endowment portfolios.
 

"Our approach is similar to those other successful large institutional investors have followed, and it's really benefited the portfolios. We've been doing it for over 10 years, and our net internal rate of return on private equity has been over 15% annually."


We’re sizable enough that we can take advantage of scale and enter into programs that make sense and are economical from our point of view. These investments have higher costs in general, but in return for that, we expect to get a much better net return. Our approach is similar to those other successful large institutional investors have followed, and it's really benefited the portfolios. We've been doing it for over 10 years, and our net internal rate of return on private equity has been over 15% annually. It has been well worth it.

Trusted Insight: Looking back to your 2017 interview, something that caught our attention was that you were shifting to a more actively managed portfolio. You're not the only ones: there's a few other health systems that are doing the same. Can you give us a quick update on that effort?

Michael Odlum: Sure. Northwell has had an active management focus for year including well before I joined the health system in 2011. When I began career in the mid-1970s, I was heavily influenced by the efficient markets theory and the idea of passive investing as a way to beat the average active manager. Additionally, my decade in the 1990s at Vanguard reinforced that inclination, although Vanguard also utilizes active management for many of their funds.

Northwell has a very engaged and experienced investment committee—more so than most other committees. And it’s also dedicated to the approach of taking on active manager risk: that is, having more concentrated portfolios and relying on skillful managers to produce excess returns.
 

"Last year, we probably had our second-best year in terms of percentage return, and the best year in terms of dollars, because of our growth as a health system."


And in fact, we do use indexing: we offer Vanguard index funds in our DC plans. The participants in those plans have allocated over half their assets in index funds, which makes a lot of sense. But our team has not used indexing: we've been relying on active management and have been generating excess returns. I never would have expected to say this to you if you had asked me 10, or even five years ago. I would have thought we would have reverted to a mean. But we have not. We have continued to produce very good results: over 100 basis points in excess of the benchmark annually over the past 10 years on our equity investments and about 50 basis points overall, net after all fees. You can't argue with that.

Trusted Insight: I want to get your take on 2020: it’s been one heck of a year for investing, due to the ongoing pandemic. As an LP investing on behalf of a health system, what challenges and opportunities did the pandemic present?

Michael Odlum: Well, we've held our target allocation steady throughout. So late in the first quarter of last year, an understandable argument would have been to pull back on equity exposures and be more conservative. We stuck with our strategic allocation targets, and it paid off. The markets helped with a significant recovery over the rest of 2020. We also had good active management results. Last year, we probably had our second-best year in terms of percentage return, and the best year in terms of dollars, because of our growth as a health system.

It was quite a challenge on the operating side. Northwell was at the forefront of handling COVID patients. And of course, New York was the epicenter in the beginning. We handled about 3,400 COVID cases at the peak in early April. That figure came way down during the summer and then came back up during the second surge, to about 1,300. Through the end of March 2021, Northwell has treated more than 178,000 COVID patients.
 

"The aid from the government was sorely needed—and it helped quite a bit. The investment returns will be giving us good net income and contributing to the financial strength of the health system going forward."


The pandemic disrupted our ongoing operations in the beginning, during that first surge. We never ran out of supplies, but it was a challenge for us to manage that. Having the benefit of multiple hospitals allowed us to balance our caseloads. During this last surge, we were able to maintain our normal operations. So the pandemic ended up costing us quite a bit of money on the operating side: we lost revenue from elective surgeries, for example, as well as incurring the increased costs of making sure we had enough supplies. The aid from the government was sorely needed—and it helped quite a bit. So we'll end up with pretty close to even, or maybe post a small operating loss. The investment returns will be giving us good net income, and contributing to the financial strength of the health system going forward.

Trusted Insight: Hopefully things will be drastically better next year.

Michael Odlum: Well, we are also hoping they will be better. No one knows where investment markets will go—but we think the economy has a lot of things going for it. One of the positives of investing is that it doesn't correlate exactly with what's going on in healthcare. So, investment income can serve as a complement to the operating results.

We do have healthcare investments in the portfolios, they are a small part. If you look at a graph of the operating earnings of the organization over a long multi-year timeframe, it's a nicely rising line with modest annual fluctuations. When you look at the return on investments, the annual return pattern is much more volatile. So, one thing we look at is the volatility of the general funds, those corporate assets that we manage. We want to make sure that we don't impact Days Cash On Hand past a certain level that we like to maintain. So, we stick with a fairly conservative allocation, but were still able to achieve a good return in 2020.

Trusted Insight: Now more than ever, we’ve seen innovative health and insurance startups collaborating with traditional players like Northwell Health. Do you have a group in your organization that deals with working with these new innovative startups directly?

Michael Odlum: Yes we do have a separate group that looks at these types of opportunities that can have potential strategic benefits.

In our group, we look at our investments, in healthcare or any other sector, purely on the basis of investment features. If there's a strategic investment or strategic decision to be made, that would be something for our strategic investment group. We do talk to each other, but we keep decisions regarding strategic investing separate from the main investment program.

Trusted Insight: You’ve been an investor for over 40 years, and I’m sure some of your experiences shaped how you invest in today's markets. Is there anything that you'd like to add to our discussion today?

Michael Odlum: Well, I always like to say that more experience helps. It doesn't just reduce the element of surprise about what can happen in the markets; it also gives us the confidence that our approach of selecting high-quality managers and diversifying the investment portfolios is ultimately the best way to go.

Also, the knowledge and expertise of our investment committee has been of enormous value to the health system, but they would be the first to admit that no matter how much experience one has, it helps to ask questions. You can compare what's happening in markets to things that you've seen before, but it's never going to be the same.

View our full catalog of interviews here

The full list of 2021's Top Health System Chief Investment Officers can be found here

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