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Those questions are not meant to be exhaustive. So feel free to
discuss other things you deem important. You are encouraged to collect facts and/or data
to support your arguments.
1. As a healthcare organization, why does the Partners care so much about its nancial
investments? How does the Partners manage its investments? Are there any chal-
lenges when making investment decisions? What are the proposed changes and the
motivations behind such changes?
2. Suppose dierent hospitals within the Partners choose dierent mixes of the \risk-
free” STP and the baseline LTP, whose future expected returns and risks are shown in
Exhibit 3. On a risk-return graph, plot the returns and risks of the various potential
portfolios in Exhibit 3. What shape does a line drawn through these portfolios take?
In contrast, what would the risk-return opportunities available to the hospitals be if
they could invest only in the STP and US Equities?

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3. Suppose the hospitals within the Partners can invest in the STP and only one
of the
two real assets (and nothing in the baseline LTP). Which real asset would provide the
better risk-return tradeo? Explain your answer.
4. On a risk-return graph, plot a curve of the optimal portfolio combinations in the
baseline 3-asset case detailed in Exhibit 5a: US Equities, Foreign Equities, and Bonds.
(Hint: This curve should look just like the one in Exhibit 5b.) Then, on the same
graph, plot a curve of the optimal portfolio combinations in the 4-asset case in Exhibit
6: US Equities, Foreign Equities, Bonds, and REITs. Do the same for the 4-asset
case in Exhibit 7: US Equities, Foreign Equities, Bonds, and Commodities. Does the
addition of each real asset improve the risk-return opportunities? If so, how? Which
real asset brings more improvements? Can you reconcile your answer here with the
one in part 3?

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5. Plot a curve of the optimal portfolio combinations for the 5-asset case in Exhibit
7. Compared with the curves in part 4, do you get better risk-return opportunities
by adding both real assets to the LTP? Should dierent hospitals choose dierent
combinations of the ve assets (i.e., dierent LTP)? Why or why not? On the curve,
which combination of the ve assets provides the best risk-return tradeo? (Hint:
Graphically, nd the point with the highest Sharpe ratio on the 5-asset curve. No need
to do any formal calculations.)
6. Suppose one member hospital wishes to invest in the STP and the LTP such that the
total expected return on its portfolio is 8%. Graphically, illustrate the improvement in
risk by switching from the baseline LTP to the new optimal LTP in part 5. Similarly,
illustrate the improvement in return for a member hospital that targets a portfolio
standard deviation of 12%.
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photocopying, recording, or otherwise—without the permission of Harvard Business School.
JOSHUA COVAL

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Partners Healthcare
In May 2005, Michael Manning, the deputy trea
surer of Partners Healthcare System, was
formulating a recommendation to the Partners Inve
stment Committee. He had been asked to analyze
the role that different “real assets” could play
in Partners’ $2.4 billion long-term pool (LTP) of
financial assets. He was then expected, on the basis of that analysis, to recommend both a size and a
composition for the real-asset port
folio segment within that LTP.
Background
Partners Healthcare System was the largest he
alth-care network in New England, providing a
range of primary, secondary, and tertiary health-care services to millions of patients from throughout
eastern Massachusetts. The Massachusetts General
Hospital and the Brigham & Women’s Hospital,
two world-famous acute-care hospit
als in Boston, had joined together
in 1994 to found the Partners
network.

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Both Mass. General and Brigham not only provided acute clinical care but were also
research and teaching hospitals affiliated with the
Harvard Medical School. Over the next few years,
four suburban hospitals had also joined the netw
ork, as had dozens of physician organizations
(practices with multiple numbers of doctors) ac
ross eastern Massachusetts. A variety of important
staff functions, including treasury functions like
asset management, had been
centralized at Partners
headquarters in downtown Boston, but all the c
linical care and research took place in the
decentralized network of hospit
als and physician offices (see
Exhibit 1
). Partners’ Treasury
Department, headed by Manning, reported up thro
ugh a senior vice president of Treasury to the
chief executive officer and the board. Importantly,
there was also an investment committee consisting
of well-known and respected investment professionals who determined the investment policy for
Partners’ pools of investments, several of whom also
served as directors and trustees of Partners and
its affiliated hospitals.

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While Partners and each of its ho
spitals were nonprofits, they none
theless had significant financial
assets that played a critical role in their overal
l financial strategy. Like universities, the hospitals
sought charitable contributions, often from gratef
ul patients, and several of Partners’ hospitals had
accumulated significant endowments that helped
to fund some of their clinical, research, and
teaching programs. To varying degrees, the hospit
als also had accumulated other general long-term
funds that served as both a financial buffer against the possibility of operating losses and as a general
long-term store of value. Since it
s founding, Partners’ operating resu
lts had fluctuated, but operating
margins had been quite modest on average relative
to the 3% margin Partners management believed
they needed to maintain a healthy rate of capital in
vestment in new clinical and research facilities (see
For the exclusive use of H. Gong, 2016.
This document is authorized for use only by Hongfei Gong in FIN7041-16SS (Investments) taught by Chen Xue, University of Cincinnati from January 2016 to April 2016.
206-005

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Exhibit 2
). Since its founding, the invest
ment returns from Partners’ LTP
had played a crucial role in
maintaining the financial health of the organization (see
Exhibit 2
).
In order to accommodate the differing needs of
the various hospitals in the network, Partners
Treasury had established several centrally managed pools in which the networks’ various hospitals
and physician organizations could invest their fina
ncial resources. For purposes of this portfolio
analysis, Manning focused on two of these p
ools, the short-term pool (STP) and the LTP.
1
The STP
was managed internally by several fixed-income managers on Manning’s staff, who invested it in
very high-quality, short-term fixe
d-income instruments with an average maturity ranging from one
to two years. Partners thought of this pool as a very safe pool that could be used by the various
hospitals as the risk-free part of their holdings.
In the spring of 2005, the average yield on this
portfolio was 3.2%. The LTP, in contrast, held risk
y assets, primarily different forms of equity. Over
30 different external asset management firms that
were selected and monitored by the Partners
Investment Committee and investment staff managed
those equities. There was also a smaller fixed-
income segment in the LTP that was invested prim
arily in high-quality long-term bonds. The various
hospitals in the Partners network each had very di
fferent characteristics including their geographic
target markets, their operating margins, their vu
lnerability to underpayment by Medicaid and/or
other various third-party payers, and especially
the size of their endowment assets and other
financial assets relative to thei
r operating budgets.

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Manning and his Treasury staff worked with the
CFOs of the network’s hospitals to determine appr
opriate percentages of th
eir financial assets to
invest in the various pools. Not surprisingly, diff
erent hospitals chose diffe
rent allocations to the
long-term and short-term pools as a function of th
eir own unique financial characteristics and also
their risk tolerance.
Real Assets
Over the last several years, the Partners Invest
ment Committee had introduced a new category of
assets called real assets into the LTP. Concerned
about the future risks and returns from traditional
financial assets such as stocks and bonds, the Investment Committee had searched for untraditional
asset classes that might help divers
ify the risks of the LTP. They were particularly interested in asset
classes that might perform well in a rapidly expa
nding global economy and/or a resurgence of
inflation. As two initial steps in th
is direction, they had invested a percent of the LTP in a diversified
portfolio of publicly traded real estate investment
trusts (REITs) and another percent in a diversified
portfolio of commodity futures that approximat
ely tracked the Goldman Sachs Commodity Index
(GSCI).

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As it turned out, both of these newly a
dded subportfolios had done extremely well in 2004,
making the real-asset program a great initial succ
ess. “Better to be lucky than smart,” thought
Manning, for he knew that the more interesting
questions concerned the long-run ways in which
these two types of real assets might affect the ri
sks and returns of the LTP, particularly if their
allocations in the LTP were to be increased subs
tantially. The Investment Committee was considering
a major expansion of the real-asset segment of th
e LTP, but they wanted Manning to analyze the
potential implications of this decision very carefully before proceeding.
1
In addition, there was a money market pool for transact
ional balances, an ERISA pool for pension assets, and an
intermediate-term pool for funds with a three- to five-year ti
me horizon. These other pools will be ignored for the sake of
simplicity in this case.
For the exclusive use of H. Gong, 2016.
This document is authorized for use only by Hongfei Gong in FIN7041-16SS (Investments) taught by Chen Xue, University of Cincinnati from January 2016 to April 2016.

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By admin in Essays on October 23, 2016