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Why Mercy Confirmed Its Commitment To Hedge Funds | Exclusive Q&A With CIO Anthony Waskiewicz

by trusted insight posted 4years ago 2274 views
Anthony S. Waskiewicz is the chief investment officer for Mercy Health, where he manages the health system’s short-term, endowment and pension plan assets totaling $2.5 billion. Waskiewicz has over 25 years of investment experience advising and managing assets for institutional investors. Prior to taking on his first role as CIO in 2004, Waskiewicz spent 15 years in the asset management and advisory business, working with industry leaders at T. Rowe Price, Mercer Investment Consulting, Evergreen Investments and Morgan Stanley. Waskiewicz holds a bachelor’s in business administration and management from Washington & Lee University in Lexington, Virginia.

In this interview, Waskiewicz discusses his process for building an investment office from scratch, how the portfolio has evolved over time and his outlook for the future hospital investment offices as an institution type.

Waskiewicz was recently named to Trusted Insight's Top 30 Hospital Investment Officers. He graciously spoke with Trusted Insight on January 19, 2017. The following interview has been edited and condensed.

Trusted Insight: You've have more than 25 years of experience in the investment industry, much of that on the asset manager side. How have your past experiences shaped your approach to your current position at Mercy?

Anthony Waskiewicz: Mercy’s investment program requires the effective use of both internal and external resources. During my career I have had the opportunity to work on both sides. My previous work experience on the asset management and consulting side of the business gives me insights into how to best use these external resources. Selecting the right vendors and negotiating terms is an important part of building and managing an investment program.   

Trusted Insight: You were hired as the first chief investment officer at Mercy. When you walked in the door, what was your process for establishing the investment office? 

Anthony Waskiewicz: The focus then as it is now is to design and implement an approach that works best for Mercy. The most effective institutional investment teams implement investment solutions that fit with the mission and overarching strategies of their respective organization. We have worked diligently to customize an investment program that connects with Mercy’s mission, culture, balance sheet objectives and corporate strategies.  

In building the program here at Mercy, we have been able to hire a very talented team who in addition to being skilled investors also finds purpose in supporting the mission of Mercy. We have also developed a portfolio structure that can deliver strong performance while satisfying Mercy’s liquidity constraints and risk tolerance. 

Trusted Insight: How do you see that approach evolving? 

Anthony Waskiewicz: Mercy’s executive leadership is forward-thinking and progressive. We are encouraged to set high goals, pursue excellence and continuously challenge ourselves to be the best institutional investment team possible. That focus will keep in motion the constant enhancement of the investment function. We will also be looking for ways to be better.  

For example, we are currently in the process of building out our risk management capabilities. We have recently added a director of risk management and are taking the next steps forward to enhance portfolio risk analytics.   

Trusted Insight: What did the portfolio look like when you joined? How has it evolved?

Anthony Waskiewicz: When I joined Mercy, the organization had recently been impacted by the 2008 market crisis. The equity risk in the portfolio was very high and highly correlated to benchmarks. Previous return outcomes were very volatile and the large drawdowns strained Mercy’s balance sheet metrics and debt covenants.  

My mandate as Mercy’s first chief investment officer was to develop a customized solution that provided Mercy more reliable outcomes and was better aligned with Mercy’s economic position, corporate strategies and risk tolerance. Diversifying the portfolio risk factors and finding sources of return not purely driven by equity volatility were important to Mercy. Hedge funds, absolute return-focused strategies and non-benchmark-focused managers were added and have become effective strategies in helping Mercy achieve its desired risk and return targets.    

Trusted Insight: Private markets have become saturated over the years. Where are you looking for returns? Is it more niche strategies? Emerging managers? Established managers on their 16th fund?

Anthony Waskiewicz: The private markets do appear to be saturated, but so do many other parts of the capital markets. On a relative basis, private markets do not appear to be any more overvalued that traditional markets. Over the long-term, we believe private investments can still deliver excess returns above public market equivalents.  

We believe that building the private allocation using a mix of niche strategies, emerging managers and established firms is prudent. The emerging managers and niche strategies provide access to potentially higher returns and/or diversifying return sources that may not be as saturated as the more traditionally sourced parts of the private markets. Established managers need to demonstrate their commitment to excellence and prudent succession planning, but we believe there is merit in partnering with stable franchises that have less business risk and a proven track record managing through a wide variety of market cycles.   

Trusted Insight: Tell me about the different pools of capital that you are managing? How does the approach differ between them?

Anthony Waskiewicz: We manage four different pools of capital for Mercy: a short-term investment fund, a long-term investment fund, a frozen pension plan and foundation assets. Each pool has its own unique risk and return objectives.  

In the case of the reserve funds, the investment objective focuses on a risk target rather than a return objective. Mercy’s investment policy stipulates that the long-term return fund should maintain volatility in the 8-12% range. Managing to a risk target is prudent for Mercy given that a large drawdown in the fund would have a significant impact on the organization’s balance sheet. The pension plan is managed to a return target and has different asset allocation targets.     

Trusted Insight: Mercy recently rewrote its investment policy. Did that rewrite have a material impact on your asset allocations, whether target allocation or immediate readjustments to the portfolio?

Anthony Waskiewicz: Yes, it did, and it also confirmed our approach in a few areas.  

Mercy’s balance sheet has improved significantly the past few years. So, we were able to increase the portfolio’s target allocation to private investments. While we are cautious on the outlook for private investments, the change to the long-term target was prudent for Mercy given the healthier balance sheet.  

The updated policy and asset allocation work also confirmed our commitment to hedge funds. Given the headlines around hedge funds, it was natural for us to question whether we should maintain a high target weighting to hedged strategies. In evaluating the ongoing role of hedge funds, we concluded that it would be difficult for us to replicate the solid returns and low volatility we have been able to generate in the hedge fund program. The current investment policy for Mercy stipulates the portfolio stay within a volatility range. We believe hedge fund strategies will continue to play an important role in helping the portfolio generate strong returns within the allowable volatility ranges going forward.  

Trusted Insight: Sophisticated hospital investment offices are relatively new entrant into the institutional investing universe. What role do you see hospital investment offices playing over the next decade? 

Anthony Waskiewicz: Investment portfolios have a significant impact on the balance sheet and earnings of a health system. More and more health systems are recognizing that a strong investment function can make a difference. As a result, we are seeing the rapid build-out of health care investment teams. Many systems today are able to develop and manage sophisticated investment strategies that can more reliably meet the risk and return objectives required for that given organization.  

Some studies indicate that total hospital assets under management are now greater in size than total endowment assets under management. As assets continue to grow, health systems will have increased opportunities to advocate for better terms and access. Systems with internal investment teams will be better positioned to maximize the potential benefit.  

Trusted Insight: To what degree does Mercy collaborate with other institutional investors?

Anthony Waskiewicz: The health care investment community is a very friendly and collaborative community. The investment teams I know are very sophisticated and enjoy peer-to-peer idea sharing. Health system CIO’s find common ground in discussing the challenges associated with managing multiple portfolios, which require skill and expertise to design and implement a wide variety of customized strategies.  

Trusted Insight: It’s very likely that the Affordable Care Act will be repealed or altered in some way in the near future. What impact is that having on your portfolio strategy?

Anthony Waskiewicz: For now, we are waiting to fully understand what will be repealed or altered. In the meantime, we have not made meaningful changes to the portfolio. Mercy has a well thought-out approach to managing enterprise liquidity and risk. So, I think we are positioned to endure changes. 

Trusted Insight: What distinguishes your investment strategy from peer institutions?

Anthony Waskiewicz: There are so many high-quality investment programs in the health care space and each has its own distinguishing characteristic. For us, we have been able to produce strong long-term, risk-adjusted returns. The portfolio’s long-term sharpe ratio is excellent, which indicates the team has been effective generating returns within the risk guidelines established by the policy.  

Trusted Insight: What advice would you give to someone looking to enter the institutional investing arena on the asset allocator side? 

Anthony Waskiewicz: My recommendation for a young professional would be to learn as much as you can from experienced investors. The institutional investment industry will continue to grow and evolve. Younger professionals who have knowledge of what has worked and not worked for investors in the past will be well-positioned thought leaders of the next generation. Many of us longer-tenured investors have made all of the mistakes and have learned important lessons. Learning from these investors and the mentors that you trust and admire will help you be better investor in the future.

Trusted Insight: What should I know about you, Mercy or hospital investment offices in general?

Anthony Waskiewicz: Success at Mercy is a team effort. Effective investment functions are a product of a great environment. At Mercy, we have a great team, supportive executive leadership and a collaborative committee of experts. I am very blessed to lead one of the most talented teams in the institutional investment space. We work together and work hard to challenge ourselves to achieve great outcomes. The team is supported by visionary executive leadership and a strong investment committee that all work together to help Mercy maintain excellence.  

See who else was featured on Trusted Insight's Top 30 Hospital Investors list. Read Trusted Insight's full collection of exclusive interviews here.