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Investment Policy At New England Healthcare Case Solution

Solution Id Length Case Author Case Publisher
2026 1155 Words (4 Pages) Akiko M. Mitsui, Jay O. Light, Luis M. Viceira Harvard Business School : 204018
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The investment managers of the New Health Care activities have added more value as compared to the performance of the benchmarks. However, the lowering interest rates (Exhibit 13) by a significant margin has forced the investment committee to rethink the objectives of the long-term liabilities.

Following questions are answered in this case study solution

  1. Pension funds-Liability Hedge

  2. Pension funds-Growth Oriented Strategy

  3. Endowment Fund

Case Analysis for Investment Policy At New England Healthcare

The current objective of the Investment Committee for each fund is: 

i. Endowment Fund

The objective of the endowment fund is to create a competitive advantage for the hospital by earning additional income for the hospitals to fund research, attract highly qualified doctors and researchers, and to provide additional funds to the thin operating margins of the hospitals. It also acts as a source of equity for the hospitals, given that they have already maxed out their debt capacity.

The main liability for the endowment fund is to pay 4 to 5% to the hospitals each year. Its current asset allocation is based on 61.5% equity, 11.5% fixed income, and 27% in hedge funds. Currently, it is employing a growth strategy.

ii. Defined Benefit Plan (DB) & Cash Benefit Plan (CB) 

The objective of the Pension Plans is to ensure that it should be overfunded, so New Health care does not have to make any additional contributions to the plan. Also, given the shortage of qualified nurses, higher benefits will attract the best talent available. Given the low margins of the health care industry and the worsening economic conditions (reduced government support), it is always vital for the pension fund to meet obligations.

The main liability of the DB is both nominal (Accumulated Benefit Obligation) and real (Projected Benefit Obligation) long term fixed liabilities. These include the accrued benefits and wage inflation (Exhibit 2 highlights higher wage inflation as compared to CPI) that is prevalent in the health care sector due to a dearth of qualified resources. Whereas the main liability of the CB is the annual payout in the form of pay credit of either a maximum of 6% or T-bill + 1%. Thus, wage growth will increase the liability of CB. The current asset allocation in pension funds is 54.6% in equity, 20.1% in fixed income, and 25.3% in hedge funds.

The appetite for risk of New Health Care is much higher than the universities and its peer institutions due to its much higher exposure to equities. However, the low-interest-rate environment has resulted in the pension funds, which were overfunded by a huge margin to be at risk of being underfunded due to the PBO. Creating a liability hedge portfolio for the defined benefit plan fund using 20% equity (hedge funds and remove all exposure to foreign equity due to its extremely high volatility) and 80% fixed income will reduce the overall volatility of the portfolio. Whereas for the Cash Balance fund, the allocation should be 40% equity and 60% fixed income. The higher risk is due to the higher return of 6% given to the employees. Currently, New Health Care has zero exposure to inflation-indexed bonds. Given the rising wages, this will result in higher Cash Balances at the end of the period; thus, New Health Care needs more money to fund the CB. 

1. Pension funds-Liability Hedge

According to exhibit 12, the current volatility of the pension fund for the 8 years has been 10%, and the value-added has only been 1.86%. With the addition of management fees and other expenses, it is vital that the pensions fund is rebalanced to hedge the portfolio, so NEH does not have to add more funds to it. NEH must become more risk-averse and match its liabilities to avoid getting its debt rating lowered. According to exhibit 4, its current credit rating is AA- through which its able to finance its $1.1bn in debt at 5.25%. If the current asset allocation continues, it is a possibility that they may not be able to meet the pension obligations reducing their overall debt rating and increasing the interest to 6.12% (BBB). 

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