Partners Healthcare

Harvard Business School Case 206005

Case Software # XLS-886

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The Baseline Asset Mix of the Long-Term Pool

Prior to the addition of the real assets, the approximate asset

mix of the LTP had been:

Domestic Equity 55%

Foreign Equity 30%
Long-Term Bonds 15%
Real Assets:
REITs 0%
Commodities 0%
Exhibit 2 Selected Operating and Income Statement Data of Partners for Fiscal Years 1995–2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Gross Patient Revenue

Operating:
Net Patient Service Revenue 1,511 1,571 1,660 1,998 2,287 2,487 2,820 3,137 3,361 3,678
Academic and Research Revenue 327 339 443 448 505 548 617 718 824 915
Other Revenue 141 181 106 213 242 291 335 363 367 397
Total Operating Revenue 1,979 2,091 2,209 2,659 3,034 3,326 3,772 4,218 4,552 4,990
Total Operating Expenses 1,965 2,104 2,221 2,679 3,091 3,325 3,724 4,148 4,520 4,885
Income from Operations 14 -13 -12 -20 -57 1 48 70 32 105
Long-Term Pool:
Assets at Year-End: 636 716 887 891 1,235 1,398 1,365 1,399 1,839 2,253
Total Return during Year (%) 15.0 13.3 28.2 -4.7 25.2 18.1 -7.3 -3.3 21.1 16.7
Total Return (in $) 43 85 202 -42 225 224 -102 -45 295 307

Source: Company documents.

Notes: Long-term pool inception was April 1, 1995 (1995 reflects return from April though September). Total returns on endowment funds,
all of which are invested in the long-term pool are included in the operating and income statements only when distributed.
Exhibit 3 Summary of the Assumptions To Be Used in the Portfolio Analyses

Annual Expected Returns, Standard Deviations, and Correlations

Correlation with
Asset Class Expected Ret. Stdev US Equity Foreign Equity Bonds REITs Commodities
US Equity 12.94% 15.21% 1.00
Foreign Equity 12.42% 14.44% 0.62 1.00
Bonds 5.40% 11.10% 0.25 0.06 1.00
REITs 9.44% 13.54% 0.56 0.40 0.16 1.00
Commodities 10.05% 18.43% (0.02) 0.01 (0.07) (0.01) 1.00

Source: Author's estimates using historical data from CRSP and Thomson Financial Datastream. Standard deviations and
correlations are calculated using monthly returns from 1970 to 2004 (except REITs, which use monthly data from 1990 to
2004). Expected returns are calculated using a risk-free rate of 3.2% (the current yield of the STP) and a bond excess
return estimated from 1970 to 2004. The U.S. equity risk premium (U.S. equity expected return minus bond expected
return) is set to 7.2%, the difference in average return from 1926 to 2004. Foreign expected return is set so that the ratio
of its risk premium to standard deviation (i.e., its Sharpe ratio) matches that of the U.S. Commodity excess returns are
estimated from 1970 to 2004. The REIT excess return is estimated using data from 1995 to 2004 and then scaled by the
ratio of the U.S. excess return to the U.S. excess return from 1995 to 2004.
Exhibit 4a Other Possible Portfolio Mixes Using Only the Three Asset Classes

16 Reasonably Arbitrary Combinations of US Equities, Foreign Equities, and Bonds

Mix of Portfolio
Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds
1 9.95% 9.91% 0.26 0.37 0.37
2 9.56% 10.20% 0.45 0.11 0.44
3 9.81% 9.79% 0.22 0.39 0.39
4 10.83% 11.01% 0.16 0.60 0.24
5 11.26% 12.11% 0.67 0.11 0.21
6 10.80% 10.76% 0.31 0.44 0.25
7 9.30% 9.43% 0.15 0.40 0.45
8 10.88% 10.90% 0.40 0.35 0.25
9 9.90% 10.40% 0.47 0.14 0.39
10 10.10% 10.05% 0.20 0.45 0.34
11 8.77% 9.21% 0.18 0.29 0.53
12 10.81% 10.77% 0.29 0.46 0.25
13 11.52% 11.81% 0.52 0.32 0.17
14 9.36% 9.48% 0.12 0.43 0.44
15 9.50% 9.86% 0.37 0.19 0.44
16 11.21% 11.39% 0.48 0.32 0.21

Source: Thomson Financial Datastream.

Exhibit 5a Array of Optimal Portfolios with only U.S., Foreign, and Bonds

Asset Allocation
Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds
1 7.00% 9.38% 0.000 0.228 0.772
2 7.50% 9.14% 0.000 0.299 0.701
3 8.00% 9.06% 0.038 0.330 0.632
4 8.50% 9.10% 0.087 0.348 0.565
5 9.00% 9.27% 0.136 0.367 0.497
6 9.50% 9.55% 0.185 0.386 0.429
7 10.00% 9.94% 0.234 0.404 0.362
8 10.50% 10.43% 0.283 0.423 0.294
9 11.00% 11.00% 0.332 0.442 0.227
10 11.50% 11.64% 0.381 0.460 0.159
11 12.00% 12.33% 0.430 0.479 0.092
12 12.50% 13.08% 0.479 0.497 0.024

Source: Thomson Financial Datastream.

Exhibit 6 Array of Optimal Portfolios with Four Asset Classes: U.S., Foreign,
Bonds, and REITs

Asset Allocation
Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds REITs
1 7.00% 8.93% 0.000 0.102 0.678 0.220
2 7.50% 8.66% 0.000 0.170 0.605 0.225
3 8.00% 8.57% 0.000 0.239 0.532 0.229
4 8.50% 8.66% 0.004 0.303 0.460 0.232
5 9.00% 8.89% 0.059 0.325 0.400 0.216
6 9.50% 9.24% 0.114 0.347 0.340 0.199
7 10.00% 9.69% 0.169 0.369 0.280 0.183
8 10.50% 10.23% 0.224 0.391 0.219 0.166
9 11.00% 10.85% 0.278 0.412 0.159 0.150
10 11.50% 11.52% 0.333 0.434 0.099 0.133
11 12.00% 12.25% 0.388 0.456 0.039 0.117
12 12.50% 13.04% 0.465 0.481 0.000 0.054

Source: Thomson Financial Datastream.

Exhibit 7 Array of Optimal Portfolios with Four Asset Classes: U.S., Foreign, Bonds, and
Commodities

Asset Allocation
Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds Commodities
1 7.00% 8.61% 0.000 0.113 0.713 0.175
2 7.50% 8.23% 0.000 0.176 0.638 0.187
3 8.00% 8.02% 0.001 0.238 0.562 0.198
4 8.50% 7.98% 0.048 0.253 0.492 0.207
5 9.00% 8.07% 0.096 0.268 0.421 0.215
6 9.50% 8.30% 0.143 0.283 0.351 0.224
7 10.00% 8.65% 0.190 0.297 0.280 0.232
8 10.50% 9.10% 0.238 0.312 0.210 0.240
9 11.00% 9.66% 0.285 0.327 0.139 0.249
10 11.50% 10.29% 0.333 0.342 0.069 0.257
11 12.00% 10.98% 0.383 0.356 0.000 0.261
12 12.50% 12.44% 0.557 0.355 0.000 0.088

Source: Thomson Financial Datastream.

Exhibit 8 Array of Optimal Portfolios with All Five Asset Classes: U.S., Foreign, Bonds, REITs,
and Commodities

Asset Allocation
Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds REITs Commodities
1 7.00% 8.29% 0.000 0.020 0.643 0.180 0.158
2 7.50% 7.89% 0.000 0.082 0.567 0.182 0.170
3 8.00% 7.67% 0.000 0.144 0.491 0.183 0.181
4 8.50% 7.64% 0.000 0.207 0.415 0.185 0.193
5 9.00% 7.80% 0.036 0.239 0.348 0.174 0.203
6 9.50% 8.08% 0.089 0.257 0.285 0.156 0.213
7 10.00% 8.49% 0.143 0.275 0.222 0.138 0.223
8 10.50% 8.99% 0.197 0.292 0.159 0.119 0.232
9 11.00% 9.58% 0.250 0.310 0.097 0.101 0.242
10 11.50% 10.24% 0.304 0.328 0.034 0.083 0.251
11 12.00% 10.98% 0.387 0.354 0.000 0.010 0.250

Source: Thomson Financial Datastream.