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Josh Kaplan: There are a ton of |
When Josh Kaplan joined Ascension Health in February 2010, he became the second in-house investment staffer at the Catholic health care nonprofit. Ascension used to outsource the management of its assets, but by the beginning of 2011, the $16 billion plan had 18 people on its investment staff and had even launched a subsidiary investment management company, the Catholic Healthcare Investment Management Company, which is based in St. Louis, Mo. Chimco, now a wholly owned subsidiary of Ascension Health, manages only the nonprofit’s assets. The firm is now looking to manage money for outside investors; however, Kaplan says these would be organizations similar to Ascension Health, which focuses on providing health care to the poor and underprivileged. The investment income is used to pay the health care organization’s operating expenses and pensions.
“We’re not looking to rule the world; we’re looking for good, solid institutions that we want to partner up with that make the most sense for us, as well as them. We want it to be a complementary relationship,” Kaplan says. Many other foundations, endowments and health care organizations often form investment management subsidiaries to handle their portfolios, though taking on external capital is not common.
When Kaplan joined Ascension, he began working on a whole new investment strategy. Instead of going by a rigid asset allocation, the fund now designs its investments so that they’re geared to various economic environment scenarios. That has ended up giving a big play to hedge funds, which are typically used in the allocation for the recessionary or deflationary environment, which now command 30% of the $16 billion.
The shift started two years ago, when Ascension Health decided to go in-house with its investing, starting with chief investment officer David Erickson in September 2009. The investment subcommittee of the health care plan decided to get more hands-on and had grown large enough to bring the management in-house, Kaplan explains.
The two men bring years of endowment experience to their new jobs. Erickson, previously chief investment officer of the University of Wisconsin Foundation, and Kaplan, previously the CIO at Drexel University, got to know each other in those roles, so when Erickson got the job, he tapped Kaplan as the director of hedged strategies. Dale Hunt also joined Ascension Health in the beginning of 2010 as a director of public and private equity investments. Another endowment pro, he was previously CIO of the West Virginia University Foundation.
Kaplan and Ascension’s other investment officers have organized Ascension’s investments into three categories: growth, inflation and recession/deflation, with targets of 50% to growth, 30% to recession/deflation and 20% to inflation strategies.
“We’ve recently had a slight overweight to that last bucket, which is more defensive in nature, and it served us particularly well in May and June,” Kaplan says. “We just ended our fiscal year and had very strong absolute return and relative return performance. We significantly outpaced the bogies and hurdles that we periodically compare ourselves to.” (Kaplan declined to provide specifics.)
Ascension Health had 7.5% invested in hedge funds when Kaplan joined, and now has a 22.5% target to these strategies within the new recession/deflation portfolio and 16% invested across 27 funds. Kaplan brought many of these to the fund in the past few months. Ascension Health now breaks down its hedge fund investments into two categories, with a 12.5% target to absolute return strategies that are meant to have less volatility and less correlation to public markets, and a 10% target to more directional strategies that are more correlated to traditional investments and have higher return expectations.
Kaplan says the investment team now has a strong group of analysts and deep research capabilities to help Ascension Health and other investors tackle the sometimes opaque hedge fund world, as well as all the other traditional and alternative strategies.
AR staff writer Anastasia Donde recently caught up with Kaplan to discuss his views and his plans for Ascension Health’s hedge fund portfolio.
AR: What are some of the strategies you’ve added since you joined?
Josh Kaplan: There are three areas. The first would be Asia. I’m definitely a believer in the long-term Asia story. I was just out there a couple of months ago on a due diligence trip, and I’ve decided to allocate to a few firms that are domiciled in the region. We’ll be making those allocations very shortly. I wanted teams that had groups on the ground, that know the regulatory landscape, that know the culture, the language, the politics and that can demonstrate the skill set necessary to take advantage of the region’s prevalent inefficiencies.
The second is direct lending. That’s an area that I viewed very opportunistically. I developed an allocation a few months ago to capitalize on the credit squeeze in the small- and middle-market arena, specifically in the U.S. These strategies have very low correlation, if any correlation, to the public markets. And because of the credit squeeze, they show attractive IRRs for very senior loans on the capital structure.
The last is emerging markets. We already had that in the portfolio, but I have been adding to that exposure. In general, emerging market countries have better long-term prospects and, for the most part, have fewer macro issues than the developed world.
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Josh Kaplan: We look for strong decision makers with impressive pedigrees |
AR: How do you go about manager research?
Josh Kaplan: It’s basically a three-prong approach. The first step is to identify the players. And I do that through past relationships with managers, cap intro teams, industry networking and even publications. Then it shifts to figuring out which of those players is worth looking at further.
The second prong would be the quantitative analysis that we do. We basically go over the return streams and iterations of performance, volatility, risk adjustments and correlation analysis to see who is the most attractive and fits the profile of what I’m looking for.
Then we do rigorous qualitative analysis, which is just as important if not more important than the numbers. I do on-site visits on every fund that we invest in, as well as reference checks and background checks.
My mantra is, I don’t view it as investing in a fund but as investing in people. That’s why that qualitative analysis is so important.
AR: What do you look for in hedge fund managers?
Josh Kaplan: We look for strong decision makers with impressive pedigrees. I also look for a very sound process. That process must be coherent and understandable. I won’t invest in anything that I don’t fully understand myself.
I look for accessibility and transparency. I look for integrity of the firm. I put a lot of value in firms that have solid risk management capabilities. Alongside the people, the other most important thing is the ability of the firm to show that they have a competitive advantage.
AR: Is there anything that changed about your due diligence process after the market crash and several instances of frauds and blowups?
Josh Kaplan: The industry now has put a much greater emphasis on operational due diligence. What I’ve found is that the people in my position are really doing the deep dive on the back office of hedge funds to make sure that their trading, their compliance and their valuation procedures are sound.
The recession has allowed us to see how a lot of funds fared during that extremely stressful period. Sometimes I think it’s good to see smart people get it wrong—but only to see that they’ve learned from that experience and that they subsequently took reasonable and prudent steps to make sure that they correct what they perceived to be wrong.
AR: What are some manager qualities that give you cause for concern?
Josh Kaplan: There are a ton of things that I worry about, that keep me up at night. If I didn’t worry, I would be doing my job wrong. Some of the more common things that I tend to watch out for are things like lax risk controls, personnel turnover, managers that are suddenly taking outsize bets contrary to their history, or excessive use of leverage. Another one is funds that have a growing investor base of not-like investors. So they are adding investors who are less sticky. That gives me cause for concern.
AR: Have you redeemed from any funds since joining?
Josh Kaplan: I have redeemed from several funds since my arrival, but most of those were from legacy holdings that don’t fit the portfolio that I’m building. Then there have been a couple of redemptions recently for other reasons. As an example, I had one fund that suffered multiple key personnel departures. I view it as investing in people and not investing in a fund per se. So if those people that gave me comfort and made me confident leave, then I need to reassess the situation and figure out if I am confident in the fund going forward. Things can change on a dime in this industry, so you have to be incredibly diligent.
