Devote time to building your organization’s cash flow analysis skills and systems. Avoid a missed earning opportunity by estimating surplus cash properly in a higher rate environment. Conversely, overestimating a cash surplus might result in a liquidity crunch, resulting in unnecessary losses from security sales or penalties on unplanned withdrawals.
Revisit your investment policy under today’s economic conditions.
Your study of cash flows and operational needs may reveal excess cash that you can invest. With expert guidance and the clarity provided by a current investment policy, you can invest excess funds more effectively.
A strategic investment policy plays a foundational role in your health system’s financial stability. An investment policy gives you an accessible framework for managing seasonal and risk parameters that helps work through unforeseen events. Equally important, the policy provides a disciplined way to target improved yields on strategic balance sheet cash and risk-adjusted returns on reserves intended for specific liabilities—it’s essential for proper risk management.
Investment policies are prescriptive by design. In addition to stating investment objectives and goals, these policies typically:
- Define specific investment strategies and asset allocations.
- Outline permitted exposures and constraints.
- Provide clear guidance to investment managers that fit within your risk budget.
- Specify standards to monitor and reassess your investment policy parameters.
As you develop or refine your policy, research best practices of health systems of all sizes. Remember to consider:
Objectives – Objectives are the critical component of your policy. By setting your objectives, you frame the basic expectations for your policy’s impact on your investment portfolio.
Asset allocation – Asset allocation sets the groundwork for your investment strategy—it’s the most important set of investment criteria in meeting your financial goals. Review your asset allocation regularly to make sure it has the best odds of meeting your objectives, particularly during prolonged periods of market volatility. Your policy should require periodic rebalance actions that return the portfolio to target allocations.
Sector and credit quality limitations – For the short-term and the liquidity-focused portion of any investment policy, hospital systems should allow for sector diversity for sound risk management. Further, investment policies should allow for investment grade securities with limited high-yield exposure. Both these tactics will create the opportunity for the highest possible risk-adjusted return. Experienced investment managers can help you achieve risk-adjusted returns while staying within allowable parameters.
Investment policies for health systems versus foundations – The current market environment and recent economic actions are driving change as leaders revisit investment policies for health systems and their endowments. Some systems prefer to maintain the same policy for the health system and the foundation, but most prefer they remain separate to respect the separate legal entities and distinct objectives for each organization. As you fine-tune your policy, you should keep this in mind and make sure your goals can be achieved with your policy.
Having an investment policy is a best practice and a key to sound governance. If your organization doesn’t have an investment policy, create one now. If your current policy is outdated, make refreshing it a priority and review it annually.
Put policy into practice with reserves and liquidity.
Once your investment strategy is set, apply financial modeling to evaluate various scenarios and gauge their potential impact. This analysis provides your investment advisors with what they need to put your strategy in motion.
Start by developing a cash segmentation strategy—or refining an existing strategy—to ensure every dollar is working to your advantage. Separate your cash into operating, reserve, and strategic pools. These delineations should govern your investment strategy. Include goals, time horizon, acceptable risk levels, duration, and minimum credit rating for investments.
