Managing Healthcare with a Catholic-based Investment Policy
As vast numbers of Catholic immigrants from Ireland, Italy, and elsewhere started pouring across America a century and a half ago, in virtually every town of any size, they first built a church, and the second thing was often a hospital. But many of those St. Mary’s or St. Joseph’s are being consolidating into networks like Ascension Health, the nation’s second-largest Catholic healthcare organization, which now numbers 67 hospitals spread across 20 states and the District of Columbia. As part of this consolidation process, in 2009 Ascension Health hired David Erickson to set up a professional investment office to oversee the financial resources of the Ascension Health system and its related entities. Erickson was later tasked with leading the transformation of that investment office into a new Ascension subsidiary, Ascension Investment Management (AIM), that became an SEC-registered investment adviser in 2012.
Erickson and his staff of 30 manage some $40 billion in financial assets, including an assortment of healthcare-related portfolios and what he calls “long-term pools of capital” that are managed similarly to endowments. AIM not only invests the Ascension health system’s resources, but also manages some $5 billion on behalf Catholic religious orders and other outside clients.
The money he oversees is not pooled into one asset allocation: “Each client has a specific investment objective and their investment profiles differ. For each client, we considered their required return, the level of volatility a client can tolerate, and necessary liquidity for spending needs.” He adds, “Unlike an endowment, liquidity for a hospital portfolio might be long-term in theory, but there can be new unexpected and significant spending needs. Things can change quickly. So, liquidity is a big deal in terms of how we can invest capital for these types of entities.”
For the defined benefit pension plans, some of which are closed, Erickson says, there’s an emphasis on liability matching. “The fixed income allocation for defined benefit assets is a mix of long-duration Treasuries as we duration-match our liabilities,” he notes. As for the long-term capital pools, typically, he says, “roughly 40% would be in equities, 30% would be in credit and fixed income securities, and the remaining 30% would be allocated to alternatives, but there is no single asset allocation that works for everyone. For example, we also invest for a captive insurance company, which has a 20% allocation to equities and 80% allocation to bonds.”
While “we manage portfolios with different profiles and investment objectives,” he says, “we have created a platform that allows us manage client assets collectively in an effort to benefit from scale, which includes negotiating heavily on fees and terms and gaining access to managers or asset classes that may not be otherwise available.”
When the coronavirus hit Erickson says, “the biggest impact was on liquidity and the need for cash.” Like other healthcare institutions, Ascension hospitals paused elective procedures while spending heavily on COVID-19 care. Erickson says the attitude for most healthcare clients was, “Where’s my cash? How much do we need? And where would we get it if we had to?” He adds, “I considered this for all our clients, and determined the need for liquidity is high for many of them, so going forward, we are reviewing our clients’ portfolios in terms of implicit liquidity.”
In addition to serving its Ascension-related clients, Ascension Investment Management is managing assets for outside clients, principally Catholic institutions operating within Catholic investing guidelines, including schools, archdioceses, and foundations. Outside clients now account for more than 10% of AIM assets under management, and Erickson says, “If a Catholic-based institution walked in tomorrow, we’re structured in a way where we can sit down with them and talk about objectives and asset allocation, and once those decisions are made, we can execute quickly.”
AIM is primarily responsible for vetting and selecting third party managers to manage the strategies the AIM offers and oversees. But, he says, “We’re pretty active in overlay strategies since my previous experience was managing derivatives for ten years. If we want to add or remove certain exposures, or if we simply want beta, we may not implement this through an active manager. We might do this ourselves. For example, if we want energy exposure, we might do it through an index, a basket of stocks or hire an active manager. Although we’re not picking stocks ourselves, our risk group works closely with our investment directors to manage our exposures very intentionally.”
He adds, “We take great pride in the amount of work and effort we put into developing and implementing a Catholic-based socially responsible investment (SRI) policy. We consult regularly with Ascension’s professional ethicists when a theological opinion is needed on an investment and work collaboratively with that team when creating and maintaining our restricted trading list.” AIM’s SRI Policy acknowledges the United State Conference of Catholic Bishops guidelines but pushes beyond them. It is applied to all asset classes and AIM oversees all external managers to ensure they adhere to the policy.
In addition to avoiding investments that violate the teachings of the Catholic Church, AIM is also interested in selecting investments for its clients that promote the church’s teachings. Erickson says, “One of the most exciting things we’ve done was establish our impact investment strategy.” He adds, “We launched our first impact strategy in 2014, and now we’re on our third round. My team does an excellent job identifying investments that meet our impact objectives and we’re super proud of our work. Personally, bringing my faith and my work together is something that I’m really, really proud of.” The impact investments include a company that is building affordable housing for low-income households in Latin America and another involved in food production in emerging markets.
Erickson was born in Racine, Wisconsin. Growing up, he saw the movie Wall Street, and while many saw it as a “cautionary tale,” he says, he thought “it made investing looking exciting,” and decided, “That’s what I’m going to do.” He majored in economics at Wheaton College in Illinois, where he developed an interest in derivatives. That led to a decade as an investment banker working on derivatives with stops at Strong Capital Management, PNC Capital Markets, and Chemical Bank. For family reasons, he wanted to move back to his home state of Wisconsin, but derivatives-related positions were rare, so he got a job at the University of Wisconsin Foundation. He spent eight years there, ending up as CIO.
Now he lives in the St. Louis area. He and his wife have three college-age children. He’s always been interested in sports, particularly volleyball, but he laments, “at my age, the sports are limited to tennis and golf.” He adds, “I’m a big Green Bay Packers fan. I have a Packers podcast that I have been doing for 15 years.”
His other interest is reading. “Books really give me ideas to try on the team,” he says, adding, “Whenever I’m reading anything, my team worries that change is coming. I love trying new things and challenging our processes.”
Recent reads include Annie Duke’s Thinking in Bets and Malcolm Gladwell’s Talking to Strangers. He often finds books to be “insightful,” but he also values mentors he known along the way, particularly John Oros. Oros was a former partner at Goldman Sachs and a founder and managing director of J.C. Flowers, the private equity firm, who was chairman of the University of Wisconsin Foundation when Erickson was there.
While Erickson is steeped in ideas related to investments – and the Green Bay Packers – he cites another book he read recently, when he turned 50, called Halftime; Moving from Success to Significance by Bob Buford. It’s focused on the “second half of life,” and as Erickson sees it, “It’s a Christian-based book. It’s about turning your life from accomplishments to significance.” Erickson has been working hard on both scores.
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