Paul Gorman is co-chief investment officer & assistant treasurer at Mayo Clinic, a nonprofit medical practice and medical research group. In this interview, he discusses how Mayo Clinic’s respective portfolios have evolved during his tenure there; why artificial intelligence should not be thought of as a replacement for human judgment; and the importance of sticking to a process and disciplined approach to the markets.
Paul Gorman was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. He graciously spoke with us on Jan. 8th, 2018. The following interview has been edited and condensed.
Trusted Insight: You help manage multiple portfolios for The Mayo Clinic, including a sizable endowment and a pension fund. How do the strategies for each differ and how has each portfolio evolved over time?
Paul Gorman: There are several layers to how this works at Mayo. From an organizational and strategy perspective, we have a talented and dedicated team. My co-CIO colleague, Harry Hoffman, and I have worked together for a long time on building our portfolio. We have also been fortunate to have with us a strong head of operations, Rick Haeflinger, as well as a great team that knows our approach and portfolio. Beyond the team, we have an overarching manager-centric, active investment approach. We have strong and effective governance through our leadership and Trustees that ensure that we focus on our mission and relevant issues.
We use separate policy portfolios to help us stay focused on the key objectives, return expectations and risk considerations for each respective portfolio. For example, our endowment portfolio, which is part of our long-term fund, is focused on maintaining purchasing power over the long term and, appropriately, has an equity orientation. Our pension assets are focused on achieving a fully-funded status through asset liability management, and our short-term assets are managed to produce some income and provide liquidity. Bringing both of these elements together, our results, both short and longer term, have been strong and competitive with top performers in each area.
The evolution of our portfolio has changed from a traditional stock and bond portfolio to a more diversified mix of private and AR strategies; a shift from domestic to a mix of global, international and emerging managers across all asset classes; and greater access to markets and tools to manage risk and opportunity.
Trusted Insight: What impact do you think artificial intelligence and machine learning will have on the institutional investment world and future investment behavior?
Paul Gorman: In a good way, over time, AI and ML will likely have a profound impact on many industries including investment management. In the near term, the realms in which they will be valuable sooner will be more in the supervised learning category, where directed tasks or pattern recognition from large data sets and information retrieval are useful. At its core, investment management benefits from a combination of academic theory to create and lead strategy; execute to implement ideas; and judgment, whether human and/or artificial, to decide when to shift course.
"Drops in the market will occur, but having an equity orientation; diversification to multiple assets and strategies; and a long-term view will lead to the best returns."
AI and ML should not be thought of as a replacement for human intelligence, but simply another means of assisting and hopefully improving it. The interpretative and behavioral aspects of human nature will take more time to perfect. Until then, rather than predict future investment behavior, we will seek to benefit from these trends through the layered venture, private and public market investments in our portfolio. We will let markets dictate their utility and future value.
Trusted Insight: What are the pros and cons of using the Yale Model?
Paul Gorman: David and Dean deserve a great deal of credit for designing and implementing the “Yale Model,” which has become a framework for many in the endowment and foundation community. Their annual report serves as a barometer of how they are doing and benefiting the mission of Yale, as well as a tool to attract the next set of talented managers.
The strength of their model is recognizing that institutions with endowed or long-term capital, to maintain purchasing power over time, need an equity orientation. The elegance of their model is that, through broadening allocation to less efficient or less crowded private and absolute return strategies, using policy portfolios to guide exposure, risk and rebalancing, and having top-notch manager selection in active strategies, one has the potential to generate long-term outsized returns above real return and market benchmarks. Compounded over time, as Yale has done, and we to a lesser extent have also done, can have dramatic benefit for any institution.
"That's why we, at Mayo, strive to continuously build, in parallel, both an effective investment approach alongside understanding and credibility with our committee and leadership."
A major challenge to this approach is both identifying and gaining access to great managers. Further complicating that picture is the manner in which the size and scope of private and AR strategies have proliferated, making them more crowded, less differentiated and more difficult to maintain a sustainable competitive advantage over time.
A more hidden challenge is to think that this is only about investment policy; that by simply implementing these approaches, one will be successful. At the best institutions, like Yale, our observation is that there is also a long-term interactive working relationship and education process with talented investment committee members and university leadership. Few institutions are a lot like Yale, because it’s hard to do. One must be aware that in times of stress, at either a manager or overall market level, staying the course requires investment leadership and confidence in the investment committee; trust in the approach and patience to let it unfold. It’s the combination of doing both these things which is special.
That's why we, at Mayo, strive to continuously build, in parallel, both an effective investment approach alongside understanding and credibility with our committee and leadership. There is much to admire and be informed about the Yale model, but you need to focus on what strategies and approaches best fit your own organization and mission.
Trusted Insight: What would you say is the best long-term investment strategy to protect yourself from a potential drop in the market?
Paul Gorman: If your investment objective is to maintain purchasing power over time, then history is clear. There are very few libraries built off the historical returns of cash or bonds. Drops in the market will occur, but having an equity orientation; diversification to multiple assets and strategies; and a long-term view will lead to the best returns.
Be prepared to resist the siren calls of seemingly easy returns and crowded markets, or the belief that “It's different this time.” Stick to a process with consistency and a disciplined purpose. For us, that means using a policy portfolio as a guide and rebalancing into markets and opportunities where others may choose to go the other way. Doing what the crowd does rarely leads to differentiated success. It’s not easy, but it’s necessary for improved returns and limiting downside risk over the longer term.
Trusted Insight: One of the biggest challenges for a pension fund is to achieve its assumed rate of return. How achievable is your pension fund’s assumed rate of return considering the tough market conditions with low returns?
Paul Gorman: Like others, given the current low level of interest rates, we have reduced our actuarial assumptions. While pension plans are more about asset-liability management than simply returns, we believe our current assumptions are achievable over the longer term. Similar to our endowment approach, our pension plan has and will continue to benefit from strong manager selection and performance, diversification across public, private and absolute return strategies to deliver a mix of return streams and, importantly, ongoing organizational commitment to support our plan.
Trusted Insight: What advice would you give new investors entering the institutional investment world?
Paul Gorman: For organizations, my advice knows what you are trying to accomplish as an institutional investor and appreciate outperforming markets, over the long term, it is a challenging task. If you are committed to building an institutional portfolio, seek out seasoned individuals to help you with this task. Consider the experience and guidance of a few, well-regarded investment consulting firms early in the process to help you frame policy issues and other matters to get off the ground. Finally, work to ensure the portfolio reflects and, where appropriate, leverages, the mission and purpose of the organization and takes a long view to measure success.
For individuals new to institutional investment management, dig in. Start with a single asset class understanding, but seek to become a generalist across asset classes over time and seek out the guidance and perspective of other colleagues both within and outside your own organization. Focus on learning about managers, and more holistically, the investment process, and be willing to do many types of tasks. Read widely and work to build informed conviction about managers and market opportunities, recognizing that the best investment decisions require different, and usually contrarian thinking. Finally, find a place whose mission, purpose and culture fits you, and where, over time, you being there makes a difference.
You can view our full catalog of interviews with institutional investors here.
To learn more about health care system investing, click here to view the complete list of 2018 Top 30 Health Care System Chief Investment Officers.