Institutional Allocator Reporter Kaitlyn Mitchell sat down with Susan Slocum, treasurer and chief investment officer (CIO) of Children’s Hospitals and Clinics of Minnesota (Children’s), a foundation with $750 million in assets under management (AUM), while attending Markets Group’s 5thAnnual Great Plains Forum in Minnesota on September 12.
Slocum ascended from treasurer to treasurer and investment officer in 2013, and was appointed CIO in 2018. She is considered one of the top-performing foundation CIOs in the nation by Trusted Insight, and hails from a trading background on Wall Street in the 1980s. Slocum shares why the hospital’s values and mission are personal to her and explains her decision to move back to Minnesota in 1995 from New York City to, among other reasons, develop an elite horse breeding and training facility in the Minnesota countryside.
KM: What is the asset allocation breakdown of Children’s investment portfolio?
SS: The portfolio breakdown is as follows:
- 35% public equities
- 15% private equities
- 25% liquid alternatives
- 15% illiquid alternatives
- 10% fixed income
KM: Tell me about your hospital and foundation.
SS: Children’s is a standalone pediatric health care system, with the third-largest neo-natal intensive care unit in the U.S. A big element of what we do here is care for newborns and little babies. What’s interesting about Children’s Hospitals of Minnesota is that although we have our own funds, which include our endowment, our hospital operating funds, insurance and pension funds, the major hospitals in the Twin Cities also work together on multi-employer plans—union plans. Minnesota has unionized nursing care, so managing combined pensions is a very collaborative and collegial environment among those healthcare organizations.
Of approximately 28 freestanding Children’s Hospitals in the U.S. that get together and share data, there are only four that have unionized nurses, and Children’s Minnesota is one of them. At Children’s, we also have a small, single-employer defined benefit (DB) pension plan, but we’re in the process of terminating it and allowing the employees to roll their balances into our defined contribution plan 403(b) plan, which is basically a not-for-profit version of a 401(k) plan.
The multi-employer plan is in green status with a long-term rate of return of 8.6% from an inception that dates back to the 1970s. I am the chairperson of the committee that oversees the investments. We ran the plan fairly traditionally with a lot of liquidity until 2014. At that time, we moved more into private markets and reduced the equity beta correlation in the process. 2008 hurt us like it hurt everybody, and took us down to just under an 80% funding level. Since then, we’ve come back significantly. We spent some of our illiquidity premium fairly judiciously and expect to make, with 1% alpha, around an 8% level going forward.
KM: How is your investment team structured?
SS: At Children’s we have an investment office of basically just four people, with one person dedicated to cash management and accounting. We run a fairly complex corporate portfolio, with foundation and hospital assets equaling $750 million, and $650 million in defined contribution pension assets—we manage both using very different processes. In the defined contribution plan, we are selecting mutual funds for participants to use. For the hospital/foundation, we are deploying separately managed accounts with managers and strategies that have from a narrow to a broad-based mandate.
KM: Who are your consultants and managers?
SS: We use two consultants: Stepstone for private equity and due diligence and Pavilion for performance and public market manager research. We have fewer than 30 managers overall—I don’t over-diversify my managers; I have some concentrated active equity managers.
KM: What changes have you made since becoming CIO?
SS: On the hospital foundation side, a year ago, we shifted to adopt more of a risk-adjusted profile; in 2012 and 2013, we were pretty much just risk-on, and we enjoyed some relief in good years. With a change in some key committee members in 2016, the committee’s skill set shifted enough that we managed to adjust to some risk-based metrics.
Our private equities, market and capital allocations have done well for us. Our liquid alternatives strategies, or the absolute-return bucket, is not highly correlated to the equity or bond markets—we’re trying to have non-correlated strategies with a fairly consistent return. I need a certain amount of liquidity. To me, that means being able to access within 30 days or less, so that excludes quarterly hedge funds. We’re looking hard at our equity allocation at this time. For instance, we have a concentration in energy so we do well when energy does well. I’m uncomfortable with this, so we’re looking to hedge some of that energy allocation exposure or re-allocate it in a different manner to be more risk balanced.
My fixed-income allocation is fairly unique at the moment, considering the interest rate trend. We went with a long-short global fixed-income manager, a high yield bond manager where we’ve hedged the duration down to approximately two years and some short- to intermediate-fixed-income mutual funds. In illiquid alts we have an interesting short term real-estate lending program where we are collaborating with a family office, as well as an appraisal-rights strategy.
We’re looking hard at our equity allocation at this time.
KM: How would you characterize your investment philosophy?
SS: As a CIO, your company is already going to have stated objectives and policies, and part of the issue is often how your thoughts come through and influence that. Things at which I have been successful include avoiding some material mistakes. It’s about not losing money; it’s about avoiding areas of the market that are problematic. I am fundamentally a contrarian, so I have to check that a lot. However, if I have influence, I tend to be successful looking through a contrarian lens and investing around that.
KM: What is your view on active versus passive management?
SS: We’re definitely more active, but in U.S. large-cap equities, we are looking at doing passive. We’re in the seventh innings of a long economic expansion, which is the time to go active.
KM: What’s your view on Environmental, Social and Governance (ESG) investing?
SS: We run a healthcare impact portfolio within our private equity allocation. It amounts to having healthcare venture funds as well as some direct investments in healthcare. We’re looking to assist with the development of diagnostics or devices for the pediatric world—there are a lot fewer kids than adults out there, and a lot of people who develop products for pediatrics can’t get them launched because the volume of demand isn’t there.
I also pitched a social-impact investment to my investment committee. It’s run by Obrien Staley Partners, a group known in the distressed commercial and industrial private debt space. They have created a really interesting product, though it doesn’t seem to be getting much traction in the broader community, which surprises me. The manager has gone into distressed areas and worked with the community to come up with a plan that improves housing or adds jobs, whether it’s with coffee shops or something else, and they’re making money doing it. As we consider more ESG allocations to diversify the portfolio and for the greater good [of humanity], we are looking at energy like wind and clean energy.
I tend to be successful looking through a contrarian lens and investing around that.
KM: Please describe your career path.
SS: I graduated from Carlton College, a small, academically tough private school in Northfield, Minnesota, with a major in psychology and minor in Latin—that’s the reason I’m good at reading documents and drafting legal documents. One summer during college, I had a job as runner at the Chicago Board of Trade—it was a blast, and from that experience I knew that I was good at recognizing the turns in markets. At that time, the financial markets were just starting to get financial futures and options, and there’s a whole breath of basic info that one needs to know to succeed in those markets.
I then went to work at Cargill, a multinational trading company headquartered in Minnesota. It was a really an interesting job, and while in the training program, I traded animal fat (mostly tallow, a byproduct of beef and hog processing industry) and aluminum—both are quite unique commodities. I then took a job with a commodities trading advisor (CTA). I ran the Minneapolis office that traded futures and options for six hours a day while attending business school at the University of Minnesota, Carlson School of Business MBA at night. I wanted to get into trading financial instruments and managing money, so my MBA concertation is in securities and portfolio analysis.
After graduating with an MBA, I went to work for five years at a company called Health One Corporation, the predecessor for Allina Health, headquartered in Minnesota. I stepped in and started managing a $100 million bond portfolio—it was my big break. I did well running that money, which led to a job on Wall Street.
So then, for a couple of years, I was in the mortgage-derivatives fund management business at a firm called Nakagama & Wallace Investment Management. I was there right in the middle of the mortgage derivatives crisis. We didn’t do badly for our Japanese clients, but it wasn’t going anywhere, so I started looking and got a job at Children’s Hospitals and Clinics of Minnesota in 1995. I was originally the treasury director, then was promoted to treasurer then later became CIO.
KM: What was it like being a woman working on Wall Street in the 1980s and 1990s?
SS: In those days, trading and investing was very much male-dominated, and my success was in finding people who believed in me and thought I was smart. When I went to Health One, I worked for David Jones, who was an extraordinary person and was treasurer of that corporation at that time—he recognized my abilities and encouraged growth; it was a big break to work for someone who understood the investment business and encouraged me to move forward in it. When I was in New York, Anne Wallace of Nakagama & Wallace hired me—she recognized how difficult it was to be a woman in the investment business.
My success was in finding people who believed in me.
KM: What has been the best experience in your career?
SS: Snatching victory from the jaws of defeat. I got Children’s out of hedge funds in 2004, and just now I’m going back in. Our bond and equities portfolios have outpaced a lot of people who had an allocation to hedge funds—we’ve avoided poor-performing sectors. Additionally, about 40% of our equity exposure was hedged going into 2008, so instead of experiencing a 32% down draft that year we were down 17%.
It’s pretty incredible to run money for a children’s hospital—there’s a deep mission satisfaction. When I ran money for the money manager in New York, I remember being asked to work on an RFP from an arms dealer in the Middle East. I had my epiphany right there—making money for a hospital or an institution with a great mission was where I wanted to be.
KM: What has been the worst experience in your career?
SS: One of the worst experiences I’ve had is when a new member of one of the investment committees insisted we terminate a certain manager because they didn’t understand the strategy. They pushed hard and influenced the other committee members; so I had to terminate a manager who had made more than an annualized 20% over the prior three years.
KM: In what part of the industry have you witnessed the most change?
SS: What I used to do at Cargill to get industry insight included calling people all day long, taking notes and networking. With technology today, there is too much information coming at us that is hard to filter—a reflection of the global world in which we live. Having information constantly at your fingertips can be overwhelming. This makes being an investor harder, because it takes a lot more discipline than it did in the phone calling days—but it can also be better as a result of having broader industry insights at your fingertips.
KM: What aspect or element of the industry would you most like to see changed and why?
SS: In the money management industry, I would like to see a more uniform recognition and appreciation of investment results, which means salaries more equal across industries. Some industries pay a lot for talent, and others don’t. Over the last few years, CIOs in health care have started to be rightfully recognized as a huge element contributing to their organization’s financial strength.
It’s pretty incredible to run money for a children’s hospital—there’s a deep mission satisfaction.
KM: What are your interests outside of investments?
SS: My daughter Edith and I own a horse farm southwest of Minneapolis. She’s a professional horse trainer and rider, and is in the process of buying a farm in Ocala, Florida. She competes horses we’ve bred and raised in three-day eventing. We breed horses in Minnesota and will look to sell them out of the Florida facility. We typically breed our thoroughbred stallion to warmblood mares—we believe the best mix to create strong bones and tendons for cross-country jumping and galloping 10 to 15 miles is one-quarter warmblood and three-quarters thoroughbred.
I haven’t been riding in a while because I was bucked off and landed on my feet, breaking my ankle, a couple of years ago. I expect to be back riding again in the spring of 2019.
KM: What are you reading in your downtime?
SS: Fear: Trump in the Whitehouse by Bob Woodward, A Higher Loyalty by James Comey, Nudge: Improving Decisions about Health, Wealth and Happiness by Richard Thaler. It is important to understand the geopolitical picture—it helps with economic understanding globally, especially the politics surrounding oil and gas, money supply and trends in European Union countries. A top-down understanding of the geopolitical landscape is really important—the political comes first, then the economic, and then the investment opportunity set.
KM: Where have you traveled to recently?
SS: I was in Chicago for an Institutional Investor conference this month, and will travel to New York in November because I have been nominated for the magazine’s “CIO of the Year” category at their Allocator Awards ceremony.