Leslie Lenzo is chief investment officer of Advocate Health Care, where she oversees a total asset portfolio of more than $7 billion. In this interview, Lenzo discusses how institutional investors can protect themselves when faced with a drop in the market. She also shares her thoughts on how the development of artificial intelligence and machine learning will impact the investment industry, as well as how Advocate Health’s investment portfolio has drastically changed over the past five years.
Lenzo was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. She graciously spoke with us on Dec. 15, 2017. The following interview has been edited and condensed.
Trusted Insight: Since we last spoke a year ago, what has changed at Advocate Health Care?
Leslie Lenzo: Last year was a very challenging year for health care. We are very fortunate that the investment program has performed quite well, so we have been able to contribute to our Health Care ministry here at Advocate.
In terms of the investment portfolio, we changed the structure of our fixed income program. For the past several years our fixed income portfolio has been quite credit heavy, which has served us really well in terms of performance. However, we are at a point in the credit cycle with spreads having narrowed quite a bit, and we felt like we had too much credit exposure and too much equity beta in our fixed income allocation.
"We are very careful in choosing partners that are very disciplined, valuation focused and financially conservative."
At the end of the day, fixed income is meant to serve as the foundation of our portfolio during risk-off environments, so we did reduce the amount of credit exposure that we had within our fixed income portfolio. In the place of credit, we increased our core fixed income exposure that should provide good capital preservation when you have a market downturn. The restructured fixed income allocation has much lower equity beta. That was one of the major changes made since last year.
Another area that we have been focusing on more recently is our hedge fund program. It’s a similar theme in that we are making sure we take out as much of the equity beta as we can from the hedge fund program and really focus in on idiosyncratic strategies that will perform regardless of the broader market environment. That has been a major focus over the last few months and is something we will continue to focus on going into the first part of 2018.
Trusted Insight: In a market with low yields, high valuations, and low expected returns - how do you allocate your capital to differentiate yourself from the herd and increase alpha?
Leslie Lenzo: Firstly, you want to be very diversified. Secondly, be cognizant of valuation and jump on opportunities where you can find value. For examples, as we look across the global equity landscape, we think that U.S. equities are rich compared to their international peers. So we have tilted our portfolio toward international equities in EM in particular since those valuations look quite attractive relative to U.S. valuations.
"There are no major moves into new asset classes on the near time horizon. I would say it's more of a bottoms-up exercise for us at this point where we're always looking interesting, idiosyncratic ideas."
The other area where we are seeing quite a bit of value is in MLPs. We do have a decent sized allocation to MLPs, because we think they represent one of the few dislocations in the market today.
When we look at areas like private equity we are being very, very careful. We see many people that are paying ridiculous multiples for deals and levering them up at very uncomfortable multiples. We just try to stay far away from those types of deals. We are very careful in choosing partners that are very disciplined, valuation focused and financially conservative.
Trusted Insight: Are there any particular asset classes you see Advocate Health moving toward in the future?
Leslie Lenzo: That is a good question, but nothing in particular. We are pretty diversified right now. There are no major moves into new asset classes on the near time horizon. I would say it's more of a bottoms-up exercise for us at this point where we're always looking interesting, idiosyncratic ideas. On a bottoms-up basis, we are always looking for new things to add. But from a top-down perspective, there is no one broad area that we are looking at right now.
Trusted Insight: What are some key lessons you would like to share with institutional investors within the healthcare industry?
Leslie Lenzo: I think that for health care investors the biggest thing they need to be thinking about is how does the investment program integrate with the operations of the health care organization. It is important to make sure that everything you do in the investment program is furthering the mission of the health care system. You have to make sure that the ultimate goals and strategies are aligned between the organization and the investment program.
Trusted Insight: What impact do you think artificial intelligence and machine learning will have in the institutional investment world and investment behavior?
Leslie Lenzo: I think it is already starting to have an impact. In our portfolio, we have both fundamental discretionary strategies and quantitative strategies. AI and machine learning definitely play into those quantitative strategies.
Even with the fundamental strategies, we are finding a lot of investment managers who are starting to hire data scientists because they are finding that there is a lot of information in all of the data that is available. If you have a data scientist or several data scientists in-house to help interpret all of that quantitative data, that can be very informative to your fundamental investment process. I think those trends are just going to continue as the world generates much more data with every day that goes by.
Trusted Insight: What advice would you give institutional investors starting a new program today and to those that are looking to enter the institutional investment world?
Leslie Lenzo: My biggest piece of advice would be to make sure you thoroughly understand the mission, values and goals of your organization. When you are building your investment program, make sure that that investment program is well aligned with the broader organization.
To someone who is completely new to the industry, my advice is to be a sponge. Try to learn everything you possibly can and talk to as many people as you can. Try to soak everything in. That's going to push you up the learning curve very quickly.
Trusted Insight: What is one highlight of your career so far that you are the proudest of?
Leslie Lenzo: I am really proud of the portfolio we have built here at Advocate. Over the course of the last five years, we have completely revamped the portfolio and I am extremely proud of what we have today. The portfolio today reflects the values of the organization and is built with the organization’s mission and goals in mind.
The biggest change since I joined Advocate is that we were very focused on fixed income. Now we have a very diversified portfolio that is about 50 percent alternatives. The portfolio looks nothing like it did five years ago.
Trusted Insight: What does the decision process look like when you allocate assets today?
Leslie Lenzo: We are just always looking for the best ideas that will fit into the structure that we have built. We look at investment manager's process, philosophy, performance, people, values, and the alignment of incentives. All of those things play into the decision process. I think for us maybe more than for some people, we really put a lot of stock in the alignment of values. As a faith-based organization, the type of people we are partnering with and the character of those people are really important to us.
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