David Holmgren, CIO of Hartford HealthCare, a hospital fund with $3.3 billion in assets under management, paid a visit to Markets Group’s New York City headquarters just prior to the Thanksgiving break and chatted with Institutional Allocator Reporter Kaitlyn Mitchell. Holmgren opined on the passive versus active debate, international politics and his work-life-balance as a single father.
IA: What is your take on the active versus passive management debate and outsourced CIOs? And, how much does this have to do with fee compression?
DH: This is one of our industry’s never-ending debates, and there’s no right answer. For us, we have an excellent investment team and an investment belief that at any given moment the market is full of opportunities and risks. Therefore, we’re 100 percent active at all times, because [we believe this to be] the most prudent way to navigate those opportunities and risks (if we were passive, we’d be complacently accepting those valuation risks at all times). Since we’re well staffed, we feel it’s less risky to always look a bit different than the market by continually rebalancing away from the expense pockets and into the undervalued pockets.
The explosive growth of outsourced CIOs is a good thing, but the driver was never about costs, it was about governance. There are many plans that simply didn’t have strong oversight: Maybe because they’re too small to have internal investment teams or maybe their board had conflicts, whatever the case may be. In those organizations, their investment fund simply wasn’t being managed to any potential. Stewardship of those assets is a mandated legal obligation and, culturally, many places viewed that obligation as just a liability as opposed to treating the fund as a genuine long-term asset. So, the growth of the OCIO model has simply been organizations looking to professionally manage a previously undermanaged asset—it’s about better governance and stewardship of resources, which is really a great thing for so many smaller organizations.
IA: Can you tell us a bit about where you stand on the following asset classes currently: private equity, public equities, hedge funds, illiquid alternatives, private credit, private debt, real assets and fixed income?
DH: Similar to not being passive, we likewise wouldn’t have blanket opinions on asset classes. For example, if we were passive, we might have a stance that public equity was likely a bit overvalued; however, us being active, we instead are positioned as being a bit underweight some areas like large-cap U.S. tech stocks and overweight some areas like small-cap Japanese value stocks. The point being that we see at all times there are plenty of risks and opportunities in every asset class, one just needs to do a lot of homework and log an awful lot of airline miles to form the stance.
IA: Which asset classes are you most excited about in emerging markets?
DH: Without question, the emerging markets have become cheaper as a result of the Trump trade war and the steps toward interest rate normalization in the U.S. Right now, within these regions, we are most excited about social infrastructure (ie. roads, schools, hospitals, water treatment projects) in Andean South America, power generation and distribution throughout both Emerging and Frontier Regions, and consumerism and technology sectors in developing Asian countries. We spend an enormous percentage of our research budget partnering with the best managers we can source in these verticals.
IA: Please tell me a bit about Hartford HealthCare’s mission.
DH: Hartford HealthCare’s mission is to improve the health and healing of the people and communities we serve.
DH: 8½ years now.
IA: Which consultants and managers do you use, and how many of each?
DH: We’re using the specialist model as the best match for our investment philosophy to be globally diversified and fully active. Therefore, our program likely has more consulting relationships than others of similar size.
For consulting resources, we partner with Mercer for growth assets, Aksia for risk reducing assets and Pavilion for economic hedging assets. For manager resources, we have about 70 relationship partners around the globe.
IA: What is your institutions’ asset allocation breakdown?
DH: Growth assets at 52%; risk reducing assets at 34% and economic hedged assets at 14%. Within growth, we’re pretty excited about our recently built frontier equities and Chinese venture exposures. Within risk reducing, we’re most excited by our diversified hedge fund program as well as our global private credit portfolio. And in economic hedged, we’re most excited about a new social infrastructure fund we’re doing in South America.
IA: How has your life path led to your role as a CIO?
DH: I did my undergraduate in Economics at Denison University (with a minor in Spanish) because I thought that I wanted to eventually be an international economics professor. But when I started the Ph.D. program at Warwick University (England) in 1985, I started working at a brokerage house there and found I had a skill and keen interest in security selection. So I dropped out of graduate school and worked in London for a couple years. I went back for my Masters in Business at Columbia University in 1995 and transitioned into global asset management at DSI (which later became part of UBS). I moved from the asset manager side to the asset owner side joining the Connecticut State Treasury in 2006 for family reasons—naïvely thinking at the time that asset owners got more time home with their kids than asset managers did. But, note to self: that’s not necessarily true! (laughs).
IA: How would you characterize your investment philosophy?
DH: Long-term, value-biased, globally-diversified, bottom-up research based.
IA: What has been the best experience in your career?
DH: I’ve been super lucky during my career, so it’s pretty hard to highlight any single experience. Just knowing that my work has helped to move the needle in contributing to the organization’s ability to meet its mission is pretty great. I remember one board meeting about four years ago. When I arrived at the hospital boardroom I walked straight to the cookie tray to pull out a couple of raisin oatmeal cookies for myself before I sat down. (A strange thing about hospital meetings is that they always have good cookies.) After the meeting kicked off, the chairman presented me with a full tin of David’s Cookies—‘David’s’ brand—it was incredibly thoughtful of them. The chairman, on behalf of the board, expressed thanks to me for all that I’d done for them—it was really awesome. Knowing that I’ve made a difference is a satisfying experience.
IA: What has been the worst experience in your career?
DH: Recently, the global rise of acrimonious politics is sickening. I’m still bothered by the Brexit vote of June, 2016. I don’t feel the ‘Leave Campaign’ was truthful in many aspects, which only threw fuel on the global tide of inward, isolationist policies. Politicians creating hysteria has only polarized their masses, robbing the youth of the unity that so many have fought to obtain. As a CIO, so much of our job is translating global trends and environments in the hopes of best positioning our funds for various outcomes. And having to witness the current era of global politics is truly a painful experience for any capable CIO.
IA: In what part of the industry have you witnessed the most change?
DH: Consolidation. In my 30 years in the industry, the number of traditional fixed-income houses or equity houses has been halved. A number of factors have contributed, including the corporate shift from defined benefit (DB) to defined contribution (DC), where the focus has been on cost minimization and the advancement of data sources, which drove up costs to compete for unique alpha, etc. There are noticeably fewer traditional managers, and I’m not entirely certain that’s a good thing. I think return dispersion among market participants has come down as a result of more assets being clustered in fewer hands.
IA: What aspect of the industry would you most like to see changed and why?
DH: The short term-ism has made everyone afraid of being different. Our industry has become so uber-sensitive to short-term performance that many are now afraid of being viewed as being wrong, simply because their last quarter or year underperformed a benchmark. I would love to see benchmarks used more for risk analysis of one’s exposures, not merely a record of one’s short-term success or failure. I think to win in the long run we need to be willing to accept underperformance during the market inflection points, or short-term market distortions.
IA: Is Hartford Healthcare involved in ESG initiatives?
DH: Although we run ESG-type initiatives, we don’t manage to a formalized ESG policy. We maintain an intensive governance-friendly framework that centers around our philosophy of actively partnering with like-minded investors. For example, we genuinely want to only work with nice people, so we meet every prospective manager and do an in-person cultural assessment to subjectively assess our alignment with them. Our ESG principle here being that due diligence such as this helps us avoid the risk of bad actors.
IA: Who makes up your family?
DH: I’m a single dad of three fantastic boys, Nicholas, Alexander and Marcus—my three czars—all in their early twenties, who love to argue the world order from a Millennial’s perspective. A millennial believes that all issues can be easily settled by public opinion, either ‘YES’ or ‘NO’ and although I do love the optimism and believe that things could be a lot simpler, sadly we’ll always take long bureaucratic paths to solve issues like environmental reforms, gun control, student debt crisis, etc.
IA: What are your hobbies?
DH: My go-to when I need to blow off steam is comedy clubs. And more recently I’ve taken up Hot Yoga, which in itself is super funny, given my total lack of balance (chuckles).