The Future Of Health Care Investment Offices | Exclusive Q&A With Michael Malewicz, CIO Of SSM Health
Michael Malewicz is the system vice president – treasury and chief investment officer at SSM Health, a Catholic, not-for-profit health care system. He leads the SSM Health Portfolio Management Company. He is in charge of developing capital strategies, leading the issuance of debt, maintaining rating agency relationships, continuously enhancing the investor relations program, financial modeling and mergers and acquisitions.
Prior to joining SSM Health in 2013, Malewicz had worked in the treasury and investments departments at several health care systems, including City of Hope in Southern California, Washington Hospital HealthCare System and Swedish Health Services. Prior to his health care career, Malewicz worked in corporate finance at Qualcomm Inc., Quiksilver Inc., and as an investment banker for the Industrial Bank of Japan. Malewicz has an undergraduate degree from San Diego State University and an MBA from University of San Francisco.
In this interview, he talks about managing a $4 billion asset pool for a health care system, what factors come into play when making asset allocation decisions, and his view on how hospitals will evolve as investment plays a bigger role in supporting operations.
Mr. Malewicz was recently named on Trusted Insight’s Top 30 Hospital Investment Officers. He graciously spoke with us on January 25.
Trusted Insight: What’s the makeup of SSM Health's investment pool?
Mike Malewicz: The total pool is approximately $4 billion. It consists of corporate assets, pension funds, various self-insurance trusts and a number of internal foundations. We have 20 hospitals, and many of them have separate foundations.
Trusted Insight: How are these investments managed?
Mike Malewicz: We have a unitized structure, meaning that the manager sees it as one large portfolio, with the trustee separating the holdings into units for accounting purposes. As a result, we get great scale of economy.
We have allocations in equities (U.S., international and emerging markets) and fixed income (U.S. and international), which make up over 50 percent of the portfolio. We also have a direct hedge fund program, a Real Assets program and a private equity program .
Trusted Insight: Is this asset allocation typical for hospital portfolios?
Mike Malewicz: For the larger systems, it is somewhat typical. Although we have some nuances that are slightly different.
Trusted Insight: As CIO, what factors do you take into account when making asset allocation plans?
Mike Malewicz: We think about cost, flexibility and simplicity, and we set our own model, being partially passive and partially direct. In addition, we’re always looking for innovative ideas and direct access to talented investment managers.
Trusted Insight: Where is your investment performance standing relative to your return goals?
Mike Malewicz: Our desired rate of return is different for each pool and it changes every three to five years. Our historical returns have been consistent with our objectives. We have achieved that by being consistent with our asset allocation, which we rebalance a couple of times a year. We are also optimizing our portfolio by directly accessing hedge funds. We index a large portion of our equity portfolio to minimize cost and maximize return.
We had a good 2016 for the entire unitized portfolio. Our best returning assets were U.S. equity and Real Asset composites.
Trusted Insight: As you mentioned real assets, last year, SSM Health divested from all the coal companies in your portfolio. How was that capital re-invested?
Mike Malewicz: Part of the divestment from coal has been re-invested. The divestment of coal actually occurred at the U.S. and international equity level, so publicly traded stocks. During 2016 we moved into socially screened index funds for U.S. large-cap and mid-cap equities.
Trusted Insight: How is SSM Health’s investment office structured?
Mike Malewicz: Our entire treasury department is not segmented by investments or treasury operations. In total, we have seven people in treasury and investments.
Trusted Insight: Many health care systems run with smaller investment offices of usually two or three people. Do you see a trend of hospitals expanding their investment offices?
Mike Malewicz: Some hospitals separate their investment staff from their treasury staff and use investment consultants to augment their investment staff.
A lot of larger health care organizations have built out much larger investment staff. There is a trend to add more staff as sophistication and portfolios grow. However, we resisted that because we wanted to keep the entire treasury and investment process as one, rather than separate. We've tried to integrate our investment philosophy with our corporate model, as they support each other, meaning the corporation throws off cash flow and the investment operations invest that cash. The investment portfolio then provides liquidity when the corporation needs it.
Trusted Insight: Prior to SSM Health, you had worked at a number of other health care systems. What have you seen hospitals have in common?
Mike Malewicz: I think that there's a growing understanding of risk in health care organizations, especially around portfolios and leveraging their portfolios to produce liquidity for the organization. I think that's been a good thing. As health care organizations grow, and they have grown quite a bit, some are starting to look more and more like endowments. At the other end of the spectrum, some health care portfolios remain highly liquid to support operations.
Trusted Insight: What challenges do hospital investors face in current environment?
Mike Malewicz: We focus a lot on hospital operations. We are a $5.5 billion organization. As operations grow and expand, our portfolio needs to support that growth. Operating risk is probably as high as market risk, because operating needs can vary so much from year to year.
To be mindful of the operating risk, we conduct a lot of modeling and financial forecasting to determine how much cash we can expect to generate.
Trusted Insight: The Affordable Care Act is very likely to be changed or removed in the near future. What impact do you think it will have on your investments?
Mike Malewicz: Our major markets do not consist of Medicaid expansion states, so the repeal of the Affordable Care Act may not have as big of an effect on our operations as it may on other health systems. But we are cognizant of what's happening in the market, and we're seeing trends. We are modeling those trends now and forecasting what cash flow is going to look like. We are actually going through a study at the moment to determine what is the most efficient asset allocation for the organization.
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.