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Investment Summary
FROM THE INVESTMENT OFFICE
Children’s Health’s philanthropic and reserve assets are stewarded by Children’s Medical Center Foundation. Assets are invested in a diversified portfolio, which is constructed to maintain purchasing power net of spending in the long term, while supporting the organization’s near-term needs.
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INVESTMENT PHILOSOPHY
The Investment Office at Children’s Health manages the financial assets of the health care system, which includes board-designated reserves in the form of a quasi-endowment, as well as donor funds entrusted to Children’s Health in perpetuity
These assets share a longtime horizon aligned with the century of service we have already provided, and the community benefits we seek to provide in the next 100 years
The size of the Foundation’s investment portfolio, at approximately $2 billion, offers a wide array of opportunities for active investment management, giving us the opportunity to partner with talented external fund managers to identify profitable investment opportunities greater than what the broader stock and bond market can provide
Active management goes hand in hand with diversification across investment mandates, investing styles, geographies and asset classes No single investment strategy shines in every market environment Buying on weakness and selling on strength gives the Investment Office the opportunity to add value by reallocating funds The combination of active management and diversification allows us to strive for superior investment results over the long term
Active management also requires a keen awareness of risk Importantly, we seek to balance the long-term risk that inflation erodes our purchasing power with short- to medium-term movements in capital markets that are constantly changing and outside the control of any one individual It is imperative to understand and evaluate risks before attempting to manage them, including a cleareyed assessment of forward-looking estimates of risk and return potential
The four pillars of our investment approach — our long-term horizon, active management, diversification and awareness of risk — are meant to uplift the mission of Children’s Health For the Investment Office and its immediate governing stakeholders, our first duty of care is as fiduciaries for the financial interests of the hospital system and its mission, including its ability to serve future generations
ONE-YEAR PERFORMANCE
During the 2021 fiscal year, the Foundation’s investment portfolio grew by $266 3 million, from a starting value of $1 91 billion on December 31, 2020 Assets under management ended at $2 17 billion on December 31, 2021, after $20 3 million in charitable payout during the year The portfolio’s capital appreciation equates to a 13 9% return for the fiscal year, compared to a 12 2% return for the Foundation’s policy benchmark
The Investment Office, in close collaboration with management and the Investment Committee, added 1 8%, or $33 6 million, in incremental value during 2021 through a combination of manager selection — how an investment in the portfolio performed relative to its benchmark — and asset allocation — the process of deciding where to put money in the market, balancing risk and reward The Foundation’s financial performance in 2021 was particularly strong because both manager selection and asset allocation contributed positively to profit
With the capital markets constantly in flux, it is unrealistic to expect linear progress in both asset allocation and manager selection year after year It is likely that the extraordinary market conditions of 2020 and 2021 pulled forward future returns, making careful investment management more important going forward Last year was also the first full year when an in-house team managed the investment portfolio The Investment Office added $31 5 million in value net of its own overhead costs
THREE-YEAR PERFORMANCE
For the three-year period ending December 31, 2021, the Foundation portfolio returned 13 7% per annum, outperforming the policy index’s 13 1% return by 0 6% per annum
THE MISSION OF CHILDREN’S HEALTH
Positive value-add over this specific three-year period is impressive given that it includes one of the most challenging times in markets, when the start of the COVID-19 pandemic wreaked havoc on equities and other risk assets
The result is notable because Children’s Health underwent a leadership transition in the Investment Office during this time Prior to the arrival of new staff, the subsequent introduction of new governance, and the ratification of a strategic plan for the portfolio, the Investment Office was in a state of flux that made it difficult to achieve a well-coordinated top-down strategy
Because of this, asset allocation detracted value over the three-year period Yet at a microeconomic level, thanks to the indefatigable efforts of volunteers, individual investment line items performed well compared to their strategy-specific benchmarks, with manager selection contributing more than 100% of the net value add over the three-year period This outcome is a testament to the extraordinary efforts of Children’s Health management and the Investment Committee
CONCLUDING THOUGHTS
After more than a century of service, now is the time to ensure we’re ready to meet the unique and wide-ranging needs of generations to come As we envision the next chapter of Children’s Health, it is important to ensure the Foundation’s financial assets work even harder, in alignment with the long-term mission of the hospital system
The importance and the immediacy of our mission in the community today leads us to demanding financial objectives Increased payout requirements have arrived at a time when the market cycle is advancing, unfamiliar risks are emerging, and high valuations remain in many areas of the capital markets
The Investment Office sees these challenges as a source of inspiration We invite our partners, stakeholders and friends to help us grow and to grow with us as we continue to strive to make life better for children – Ken Lee, Children’s Health Chief Investment Officer
RETURNS OF THE TOTAL FUND AS OF 12/31/2021
ONE YEAR THREE YEARS FIVE YEARS
Fund 13.91 13.68 9.49 Benchmark 12.16 13.11 9.33
ASSET ALLOCATION AS OF 12/31/2021
ACTUAL TARGET POLICY BENCHMARK
Global Equities
Developed Markets Emerging Markets
54.0 51.0
37.4 36.0 8.6 10.0
Private Equity
8.0
Diversifying Strategies 24.1
Hedged Equity 10.1 Event Driven & Credit 7.6 5.0
25.0
10.0 8.0
Opportunistic
Real Assets
Liquid Real Assets Private Real Estate
6.5
7.8
4.8 0.7 Private Natural Resources 2.3
Cash & Fixed Income 14.0
Investment Grade Credit 6.8 U.S. Treasury Bonds Cash 1.2 6.1 7.0
9.0
6.0 2.0 1.0
15.0
5.0 5.0 5.0
TOTAL FUND 100.0 100.0
ENDOWMENT DISTRIBUTION POLICY
The current annual spending policy for endowments at Children’s Medical Center Foundation specifies a 5% distribution of a rolling 12-quarter average of the ending fair market values of the fund Because the endowment pool performance fluctuates from year to year, the use of a 12-quarter rolling average helps to stabilize the support these funds provide to programs The 5% distribution rate is reviewed annually in order to protect the corpus of the endowments and to ensure the funds continue to provide sustainable, reliable support for the donors’ designated purposes Endowment distribution policies comply with the Texas Uniform Prudent Management of Institutional Funds Act, as amended
Distributions from each endowed fund are made to corresponding restricted accounts that ensure distributions are used in alignment with each endowment’s intended purpose at Children’s Health
