Philip Rotner is the inaugural chief investment officer at Boston Children's Hospital, where he manages the hospital's endowment, pension and short-term investment assets. Previously, Rotner served as a managing director at the MIT Investment Management Company and vice president at Bank of Boston. Rotner holds a bachelor of arts from Amherst College with double majors in economics and Asian studies and an MBA from the University of Chicago.
In this interview, Rotner discusses why people are the most important aspect of institutional investing, his criteria for prospective investment managers and how the Boston Children’s investment office approaches risk.
Rotner was recently named to Trusted Insight’s Top 30 Hospital Investment Officers. He graciously spoke with Trusted Insight on January 17, 2017. The following interview has been edited and condensced.
Trusted Insight: You were appointed the first CIO of the hospital system seven years ago. Can you take me through your process for establishing and building that investment office?
Philip Rotner: There was a portfolio here before, managed by an investment committee that was a subcommittee of the board, with the use of a consultant. We inherited this portfolio, but with the goal to enhance it and bring a more proprietary approach to the investment portfolios through having an in-house team.
My goal was—and is—to build a first-class team by recruiting quality people as well as to hire some younger staff and build talent. Simultaneously, we built out a more proprietary portfolio that meets the needs of the hospital from a risk and return perspective. The portfolio is built around what we consider some of the best attributes of high quality endowment portfolio management.
Trusted Insight: What did the portfolio you inherited look like when you arrived? How has that evolved over time?
Philip Rotner: We had a good portfolio when I arrived. There were a number of interesting managers.
One of the things that a proprietary team with investment discretion can do is to match the risk appetite of the institution to the portfolio on a proprietary and a real-time basis, and it can do it better than waiting for a consultant to make a recommendation at a board’s quarterly meeting. Further, a strong, mature team takes the burden off the investment committee to interpret a consultant's manager views. We can bring real-time activity levels up by being here day-to-day and having ownership and accountability for the investment decisions.
We have some managers that existed in the portfolio previous to when we arrived. We also have a number of new managers. We can do things that leverage the organizational capabilities, both in terms of the skill sets of the investment team, but also the broader organization, the name and reputation.
We can get access to managers by having the proprietary team leveraging the skills of the investment team as well as the reputation of Boston Children’s Hospital. That's something that would be more difficult if you weren't doing it on a day-to-day basis with an internal team for the organization.
We've been able to expand into a number of managers that one would consider access-constrained. Some of those are in strategies that are more difficult to get strong performance out of, such as private equity as one example. But, they are also in other areas of the investment world.
Trusted Insight: Public markets aren’t returning what they used to. That results in institutions saturating private markets, dulling returns. Where are you looking for alpha in private markets?
Philip Rotner: I wouldn't disagree with your analysis on the market. I think what it comes down to is whether one has the skill set to identify and then access the best quality of managers out there, using the reputation of the organization and their personal skill sets and reputations.
There are managers that will both see those opportunities and take advantage of them. Our job is to be able to be an attractive capital source to those managers and be able to identify and access them.
Trusted Insight: What distinguishes your investment strategy from your peer institutions?
Philip Rotner: I think that when one looks at the world, there are a lot of great organizations out there and many of them share wonderful missions, but they may not have the necessary talent and structure in place to perform.
Like most things in life, it is the people that distinguish us. People can articulate the same strategy, but execute it differently. Critically, we are a team – and I emphasize team – that challenges each other to perform at our collective best. We have high standards. We are people who have been in the industry a long time, have built strong reputations and are able to identify and access the very high-quality managers. It's that ability to work well together, along with the requisite investment skills and a strong belief in the organization’s mission, that allows our investment strategy to be unique and successful.
Critical to any investment team’s success is having the strong organizational structure and support around them. This includes having a wise investment committee to provide governance and solid investment advice. It also includes having an executive leadership team that is supportive of the investment office. We have been fortunate to have an excellent investment committee and a wonderful executive leadership team at the Hospital. The investment committee and the hospital leadership have given the investment team the necessary trust and tools to create a high performing investment program.
Finally, we always say it comes down to judgment. Judgment is fairly proprietary. Our track record speaks for itself in terms of performance, both on an individual and team basis. That’s what's different.
Trusted Insight: Outside of a verifiable track record, repeatable process and a likeable team, what do you look for in an investment manager?
Philip Rotner: I think those cores that you talked about are all part of the process. We spend a lot of time identifying managers, and we identify them through a number of different processes.
You can also look at the world and make some decisions about where you want to be. That can help you focus your decision-making in processing and identifying managers.
You can also be out in the industry talking to various sources. I think sometimes the best sources are other managers. Sometimes they're other investors, both traditional institutional limited partners, or they could be families. They could be anybody. You just need to be open to hearing new ideas and thoughtful in your processing.
You have to be constantly out there doing individual proprietary research and trying to identify the next great manager for your portfolio. We're always doing that work, and we're always trying to turn over stones in different ways than other people do. People on our team have done that for a number of years and know how to do it well, and therefore we're able to identify really good opportunities.
We're also willing to take risks. Investing is a business of risk, and it's how you manage those risks in a way that makes sense. If we can manage those risks in ways that are comfortable for us, which may or may not be comfortable for other people, we'll be able to find investments that are suitable for our organization.
Trusted Insight: How do you approach risk when managing different pools of capital with varying risk tolerances and return requirements?
Philip Rotner: Risk is one of the interesting things. Most models of risk are built upon standard deviation. That's a classic way to build out a program and an asset allocation model.
Standard deviation is a tool that one should have in their toolbox, but one has to recognize the limitations of that tool and understand that there are other aspects of risk that one needs to measure.
Some of what you're talking about could be time. For instance, one might be a shorter term pool, one might be a longer term pool.
One might ask themselves about liquidity, because liquidity is a risk to a portfolio. So, if you're managing your short-term pool, you may not want to go into long lockup structures or you'll certainly want to think about what your liquidity flow is going to be from that. That risk, the liquidity risk is completely different than the risk typically measured by volatility and has effects on how one should think about overall risk.
One has to think more holistically about risk, and that's what we've tried to do. That's why we call our model a portfolio design model, because it looks more holistically at risk. We think that there's quantifiable risk, and we think there's non-quantifiable risk. Both have to be considered.
An example of non-quantifiable risk might be management team risk. If one is at least thinking about those non-quantifiable risk factors, they can influence your decisions regarding what goes into your portfolio and what doesn't.
Trusted Insight: Speaking of risk, the Affordable Care Act will be repealed or altered in some form or fashion. As a hospital system, how does that impact your portfolio?
Philip Rotner: It certainly impacts our business, the hospital business. That's the operating side of the business. At this point, we don't know what the changes will be. Clearly we've been going through changes as the Affordable Care Act has developed.
We have to see how those changes affect hospital business organizationally. Will they play an influence on the investment world? It's hard to say. There will probably be investment opportunities that come about from any changes. As whenever there are changes in the environment, there are opportunities. There also could be greater potential draws on the organization's capital, if necessary, to offset some of the transition costs.
Trusted Insight: What trends have you identified that are impacting how you invest?
Philip Rotner: One of the things that we focus on a lot is to ask questions of ourselves and the team, and try to figure out from various sources in the industry if an area is undervalued.
For instance, one might look at some global equities and say that they're, relatively speaking, undervalued. We ask ourselves, "Is there a fundamental reason for them to be undervalued? Has there been some movement on the curve, or has there been a shift in the curve?” putting it into economic parlance. When there's a movement on the curve, that's one thing that maybe you can think about.
If there's been an actual shift in the curve that creates a whole new opportunity set. That's what we're looking for out there. Oftentimes, there are changes. There are inflection point changes where there's been an actual shift in the curve. Those are the things that become interesting from an opportunity set, and we think will create the ability to avoid some value traps.
Trusted Insight: Hospital investment offices as a sophisticated entity are a relatively new entrant into the institutional investing universe. What role do you see them playing over the next decade?
Philip Rotner: I think that hospital investment offices, hopefully, are here to stay. If you're managing a large pool of assets and the risk on a proprietary basis for an organization, then you can really help those organizations. I think the investment teams tend to bring stability to an investment program, which is also critical for good long-term investment return.
If the hospitals can develop long-term, stable investment offices, much like some of the better-known endowments and foundations, they can build portfolios that will really benefit the organizations.
I think as hospital investment offices develop proprietary strengths and focus, they will influence the investment markets that they choose to participate in, much like some of the better-known endowments have done.
Trusted Insight: What advice would you give someone that's looking to enter the institutional investment industry right now?
Philip Rotner: One of the key elements that people should ask themselves are: do they philosophically align with the mission of the organization? I think that's a powerful piece. If you feel in alignment with your mission, you're going to feel strong about it. You're going to really feel ownership. You're going to really want to make it work well. You're going to enjoy going to work because you're going to see the benefits of your work reflected in the organization.
I'm not sure you can always say that with every job, but if you can say it, I think it's powerful. It's critical that there's more to their job than just coming in and crunching numbers, that they see the power in the philosophical alignment of their beliefs and the organization's beliefs.
Trusted Insight: What does it mean to you to be working for Boston Children's?
Philip Rotner: Boston Children's just has a wonderful mission, an absolutely wonderful mission. Before I even worked here, my children were here.
They are the world's leader in pediatric research and pediatric care. To be available to both the population of children locally, as well as both nationally and internationally, is just amazing.
It's so wonderful to see the results that come out of a place like Boston Children's, to see the technology breakthroughs that enable life-saving treatments.
That's what we work for: making the world a better place. That's what it means to me--to be one piece of a system that's contributing to making this world a better place.
See who else was featured on Trusted Insight's Top 30 Hospital Investors list. Read Trusted Insight's full collection of exclusive interviews here.
In this interview, Rotner discusses why people are the most important aspect of institutional investing, his criteria for prospective investment managers and how the Boston Children’s investment office approaches risk.
Rotner was recently named to Trusted Insight’s Top 30 Hospital Investment Officers. He graciously spoke with Trusted Insight on January 17, 2017. The following interview has been edited and condensced.
Trusted Insight: You were appointed the first CIO of the hospital system seven years ago. Can you take me through your process for establishing and building that investment office?
Philip Rotner: There was a portfolio here before, managed by an investment committee that was a subcommittee of the board, with the use of a consultant. We inherited this portfolio, but with the goal to enhance it and bring a more proprietary approach to the investment portfolios through having an in-house team.
My goal was—and is—to build a first-class team by recruiting quality people as well as to hire some younger staff and build talent. Simultaneously, we built out a more proprietary portfolio that meets the needs of the hospital from a risk and return perspective. The portfolio is built around what we consider some of the best attributes of high quality endowment portfolio management.
Trusted Insight: What did the portfolio you inherited look like when you arrived? How has that evolved over time?
Philip Rotner: We had a good portfolio when I arrived. There were a number of interesting managers.
One of the things that a proprietary team with investment discretion can do is to match the risk appetite of the institution to the portfolio on a proprietary and a real-time basis, and it can do it better than waiting for a consultant to make a recommendation at a board’s quarterly meeting. Further, a strong, mature team takes the burden off the investment committee to interpret a consultant's manager views. We can bring real-time activity levels up by being here day-to-day and having ownership and accountability for the investment decisions.
We have some managers that existed in the portfolio previous to when we arrived. We also have a number of new managers. We can do things that leverage the organizational capabilities, both in terms of the skill sets of the investment team, but also the broader organization, the name and reputation.
We can get access to managers by having the proprietary team leveraging the skills of the investment team as well as the reputation of Boston Children’s Hospital. That's something that would be more difficult if you weren't doing it on a day-to-day basis with an internal team for the organization.
We've been able to expand into a number of managers that one would consider access-constrained. Some of those are in strategies that are more difficult to get strong performance out of, such as private equity as one example. But, they are also in other areas of the investment world.
Trusted Insight: Public markets aren’t returning what they used to. That results in institutions saturating private markets, dulling returns. Where are you looking for alpha in private markets?
Philip Rotner: I wouldn't disagree with your analysis on the market. I think what it comes down to is whether one has the skill set to identify and then access the best quality of managers out there, using the reputation of the organization and their personal skill sets and reputations.
Like most things in life, it is the people that distinguish us. People can articulate the same strategy, but execute it differently.Oftentimes, they're doing something unique. Even in a world where there's significant capital flowing in and maybe the supply of capital's greater than the demand, creating perhaps a weaker investment environment, there are opportunities—unique opportunities.
There are managers that will both see those opportunities and take advantage of them. Our job is to be able to be an attractive capital source to those managers and be able to identify and access them.
Trusted Insight: What distinguishes your investment strategy from your peer institutions?
Philip Rotner: I think that when one looks at the world, there are a lot of great organizations out there and many of them share wonderful missions, but they may not have the necessary talent and structure in place to perform.
Like most things in life, it is the people that distinguish us. People can articulate the same strategy, but execute it differently. Critically, we are a team – and I emphasize team – that challenges each other to perform at our collective best. We have high standards. We are people who have been in the industry a long time, have built strong reputations and are able to identify and access the very high-quality managers. It's that ability to work well together, along with the requisite investment skills and a strong belief in the organization’s mission, that allows our investment strategy to be unique and successful.
Critical to any investment team’s success is having the strong organizational structure and support around them. This includes having a wise investment committee to provide governance and solid investment advice. It also includes having an executive leadership team that is supportive of the investment office. We have been fortunate to have an excellent investment committee and a wonderful executive leadership team at the Hospital. The investment committee and the hospital leadership have given the investment team the necessary trust and tools to create a high performing investment program.
Finally, we always say it comes down to judgment. Judgment is fairly proprietary. Our track record speaks for itself in terms of performance, both on an individual and team basis. That’s what's different.
Trusted Insight: Outside of a verifiable track record, repeatable process and a likeable team, what do you look for in an investment manager?
Philip Rotner: I think those cores that you talked about are all part of the process. We spend a lot of time identifying managers, and we identify them through a number of different processes.
We're always doing that work, and we're always trying to turn over stones in different ways than other people do.You can certainly look at all the databases out there and try to filter through that and come up with some names. Sometimes that works.
You can also look at the world and make some decisions about where you want to be. That can help you focus your decision-making in processing and identifying managers.
You can also be out in the industry talking to various sources. I think sometimes the best sources are other managers. Sometimes they're other investors, both traditional institutional limited partners, or they could be families. They could be anybody. You just need to be open to hearing new ideas and thoughtful in your processing.
You have to be constantly out there doing individual proprietary research and trying to identify the next great manager for your portfolio. We're always doing that work, and we're always trying to turn over stones in different ways than other people do. People on our team have done that for a number of years and know how to do it well, and therefore we're able to identify really good opportunities.
We're also willing to take risks. Investing is a business of risk, and it's how you manage those risks in a way that makes sense. If we can manage those risks in ways that are comfortable for us, which may or may not be comfortable for other people, we'll be able to find investments that are suitable for our organization.
Trusted Insight: How do you approach risk when managing different pools of capital with varying risk tolerances and return requirements?
Philip Rotner: Risk is one of the interesting things. Most models of risk are built upon standard deviation. That's a classic way to build out a program and an asset allocation model.
Standard deviation is a tool that one should have in their toolbox, but one has to recognize the limitations of that tool and understand that there are other aspects of risk that one needs to measure.
Some of what you're talking about could be time. For instance, one might be a shorter term pool, one might be a longer term pool.
One might ask themselves about liquidity, because liquidity is a risk to a portfolio. So, if you're managing your short-term pool, you may not want to go into long lockup structures or you'll certainly want to think about what your liquidity flow is going to be from that. That risk, the liquidity risk is completely different than the risk typically measured by volatility and has effects on how one should think about overall risk.
One has to think more holistically about risk, and that's what we've tried to do. That's why we call our model a portfolio design model, because it looks more holistically at risk. We think that there's quantifiable risk, and we think there's non-quantifiable risk. Both have to be considered.
An example of non-quantifiable risk might be management team risk. If one is at least thinking about those non-quantifiable risk factors, they can influence your decisions regarding what goes into your portfolio and what doesn't.
Trusted Insight: Speaking of risk, the Affordable Care Act will be repealed or altered in some form or fashion. As a hospital system, how does that impact your portfolio?
Philip Rotner: It certainly impacts our business, the hospital business. That's the operating side of the business. At this point, we don't know what the changes will be. Clearly we've been going through changes as the Affordable Care Act has developed.
We have to see how those changes affect hospital business organizationally. Will they play an influence on the investment world? It's hard to say. There will probably be investment opportunities that come about from any changes. As whenever there are changes in the environment, there are opportunities. There also could be greater potential draws on the organization's capital, if necessary, to offset some of the transition costs.
Trusted Insight: What trends have you identified that are impacting how you invest?
Philip Rotner: One of the things that we focus on a lot is to ask questions of ourselves and the team, and try to figure out from various sources in the industry if an area is undervalued.
For instance, one might look at some global equities and say that they're, relatively speaking, undervalued. We ask ourselves, "Is there a fundamental reason for them to be undervalued? Has there been some movement on the curve, or has there been a shift in the curve?” putting it into economic parlance. When there's a movement on the curve, that's one thing that maybe you can think about.
If there's been an actual shift in the curve that creates a whole new opportunity set. That's what we're looking for out there. Oftentimes, there are changes. There are inflection point changes where there's been an actual shift in the curve. Those are the things that become interesting from an opportunity set, and we think will create the ability to avoid some value traps.
Trusted Insight: Hospital investment offices as a sophisticated entity are a relatively new entrant into the institutional investing universe. What role do you see them playing over the next decade?
Philip Rotner: I think that hospital investment offices, hopefully, are here to stay. If you're managing a large pool of assets and the risk on a proprietary basis for an organization, then you can really help those organizations. I think the investment teams tend to bring stability to an investment program, which is also critical for good long-term investment return.
If the hospitals can develop long-term, stable investment offices, much like some of the better-known endowments and foundations, they can build portfolios that will really benefit the organizations.
It's critical that there's more to their job than just coming in and crunching numbers, that they see the power in the philosophical alignment of their beliefs and the organization's beliefs.The organizations do great work. They do wonderful research, they treat patients. The mission doesn't get any better than taking care of people. Of course, at Boston Children's, we think taking care of children is a wonderful, wonderful thing. So, it's our goal to build Boston Children’s investment office so that it can support its mission of taking care of children.
I think as hospital investment offices develop proprietary strengths and focus, they will influence the investment markets that they choose to participate in, much like some of the better-known endowments have done.
Trusted Insight: What advice would you give someone that's looking to enter the institutional investment industry right now?
Philip Rotner: One of the key elements that people should ask themselves are: do they philosophically align with the mission of the organization? I think that's a powerful piece. If you feel in alignment with your mission, you're going to feel strong about it. You're going to really feel ownership. You're going to really want to make it work well. You're going to enjoy going to work because you're going to see the benefits of your work reflected in the organization.
I'm not sure you can always say that with every job, but if you can say it, I think it's powerful. It's critical that there's more to their job than just coming in and crunching numbers, that they see the power in the philosophical alignment of their beliefs and the organization's beliefs.
Trusted Insight: What does it mean to you to be working for Boston Children's?
Philip Rotner: Boston Children's just has a wonderful mission, an absolutely wonderful mission. Before I even worked here, my children were here.
They are the world's leader in pediatric research and pediatric care. To be available to both the population of children locally, as well as both nationally and internationally, is just amazing.
It's so wonderful to see the results that come out of a place like Boston Children's, to see the technology breakthroughs that enable life-saving treatments.
That's what we work for: making the world a better place. That's what it means to me--to be one piece of a system that's contributing to making this world a better place.
See who else was featured on Trusted Insight's Top 30 Hospital Investors list. Read Trusted Insight's full collection of exclusive interviews here.