Leslie Lenzo became chief investment officer of Advocate Health Care six years ago, with a multi-pronged mission: overhaul the portfolio, forge strong, long-term relationships with managers, and build out the investment team. And, oh yes, she ended up doing this while navigating the 2018 merger of Advocate with Aurora Health Care to form Advocate Aurora Health, a move that required adapting nearly every aspect of the company’s investment program.

Her team now manages approximately $12 billion of assets, along with overseeing an additional $7 billion of defined contribution assets. That’s up from $5.1 billion when Lenzo joined in September 2013. 

Portfolio Overhaul and Manager Selection

When Lenzo took on the CIO role, she was tasked with building out an investment program with a portfolio that historically was heavily invested in cash and fixed income. Over the next few years, she reshaped the portfolio “to look more like a large institutional portfolio,” she says. That meant evaluating and optimizing every asset class, while also devising creative structures. Example: About two years ago, Lenzo restructured the fixed income portfolio from one with separate sleeves, or buckets, for high-yield bank loans and other debt to a single managed account allowing the manager to invest opportunistically in fixed income securities globally. It wasn’t easy.  It was a fairly new approach and Lenzo had a tough time finding firms able to combine the public and private pieces of a portfolio. 

She also worked to develop a manager selection model that places a strong emphasis on the strength of the GP’s team, as well an identifiable track record. As important has been finding managers that share the organization’s values. “I always tell my team, if the investment manager doesn’t align with our values, we should continue looking,” she says.

That has meant finding managers willing to work in a partnership and, as a result, come up with creative, mutually beneficial solutions. In one example, a longtime partnership with a hedge fund manager invested in two capacity-constrained, co-mingled funds. Over many weeks, they discussed how best to approach portfolio construction and optimize capital allocation, ultimately setting up a single fund to hold stakes in both of the products and then using the excess cash held within those products to fund an investment in a third strategy offered by the manager. The result was a significant increase in the efficiency of the overall account by eliminating the cash drag, plus providing the ability to net the returns of the three uncorrelated strategies to reduce the overall performance fees paid on the account in aggregate.

The work also involved building out a team, from a department with no other investment staffers to nine today. That part was a particular challenge. “It’s difficult when you’re housed in a not-for-profit organization where cost is always top of mind,” she says. Lenzo still works closely with the consultant who had previously run the program.

Navigating a Merger

One benefit from the merger for Lenzo has been a shift in roles, from both treasury and investment responsibilities to just investment. That has allowed her to focus on portfolio construction, as well as on governance, and lay the foundation for a scalable investment structure. In the first six months after the merger, Lenzo consolidated the long-term operating assets of the two organizations. With a portfolio that was about 85% invested in fixed income, she liquidated Aurora’s legacy assets and reinvested them into a more diversified asset allocation to seek a higher return. Now, all current and future entities in the company’s investment program benefit from the same investments, also allowing Lenzo to streamline accounting and tax reporting.

With the merger also came governance challenges. The prior investment committee was disbanded and replaced with entirely new members, none of whom is an investment practitioner. The result: an intensive 18-month education effort by Lenzo. Since the committee is responsible for only policy-level decisions, her focus has mostly been on such areas as investment program structure and asset allocation.

Investing in Innovation

At the same time, Lenzo is heavily involved in Advocate Aurora Health’s plans for transformation via investment in innovation. Previously, such investments were made on a one-off basis through the strategy or business development departments, without input from finance. Now, a recently hired vice president of innovation investments, formerly a partner at a health care venture capital firm, reports both to Lenzo and to the company’s chief strategy officer. While the new vice president is responsible for identifying and making investments in early-stage health care ventures and VC funds, all those recommendations require approval from Lenzo and the CSO. That collaboration between investments and strategy has improved deal structure and quality of target investment.

Derisking Vs. Adding Risk

Lenzo also has taken significant steps to derisk the company’s pension plans. After the merger, the combined organization had two frozen defined benefit plans and an open one. She recently froze the remaining open pension plan and is moving to a liability hedged investment strategy. To that end, she sold down liquid risk assets and redeployed them into fixed income. She also is working on a large secondary sale of private investments to further de-risk the plan. That has involved, for example, selling the entire buyout/growth equity portfolio at par.

She also harmonized the investment manager lineup across defined benefit and long-term operating portfolios to use only the highest conviction managers, gaining economies of scale through aggressive fee negotiation.

At the same time, in the long-term operating portfolio, Lenzo is slightly increasing risk by moving incrementally out of hedge funds, which function as a fixed income substitute, and further into private equity, with the goal of adding higher return holdings. The PE target is 19%, up from 14%, and a 20% allocation to hedge funds, down from 25%.

Over the last couple of years, because the portfolio historically has had a domestic focus, Lenzo has added exposure to Asia over all asset classes. In addition, “We see both long-term interesting alpha and beta opportunities there,” she says. “The ultimate goal is to build an innovative top-tier investment program that generates the return the organization needs.”

—Anne Field