The Total Portfolio Approach To Institutional Investing: Fact Or Fiction?

“The Chartered Alternative Investment Association (CAIA) is endorsing a new Total Portfolio Approach (TPA) to institutional investing. It eschews asset class benchmarks in favor of total portfolio outcomes, a tact proponents say could take a generation to implement.”

CIO MagazineMarch 22, 2024

“TPA  eschews the traditional concepts of asset allocation and passive benchmarks in favor of picking the best investment ideas for the portfolio designed to meet a total return goal consistent with the Fund’s  actual purpose. It is a unified means of assessing risk and return of the total portfolio.”

Pensions & InvestmentsApril 1, 2024

“We have become firmly anchored in Modern Portfolio Theory (MPT) since its introduction in the early 1950s. Its most tangible heir is Strategic Asset Allocation (SAA). All its apparatus – mean-variance         optimization, efficient frontier, benchmarking….not to mention organizational charts, compensation  structures, academic course work, the consulting industry, and performance reporting have perpetuated this world view……In recent years, however, an enterprising handful of large institutional asset owners have begun challenging the common wisdom of an SAA approach….a new approach has emerged…..we refer to it as the Total Portfolio Approach (TPA).”

John Bowman, PresidentCAIA Association

Has A New Approach Really Emerged?

So what is this new Total Portfolio Approach and will it really replace the old Strategic Asset Allocation approach? That is the question this Letter addresses. Let’s start with what the cited CIO and P&I articles have to say about it:

• “TPA is a unified means of assessing risk and return of the whole portfolio.”
• “TPA is not a specific model with a singular destination. Rather, it comprises a range of approaches that can be tailored to each asset owner in order to design a portfolio that best represents the team’s long term investment thesis.”
• “While SAA seeks to outperform benchmarks, TPA focuses on the Fund’s absolute return goals.”
• “While SAA seeks diversification through asset classes, TPA achieves it through control of various risk factors.”
• “While SAA-centric organizations implement investment decisions by multiple teams competing for capital, in TPA there is just one team collaborating together on decision-making.”
• “While the Board dominates portfolio construction under the SAA model, the Chief Investment Officer is much more empowered in the TPA approach.”
• “TPA is the ‘next realm’ of portfolio construction, succeeding the Yale, Canadian, and Norwegian Models, which are based on the SAA construct with fixed target asset allocations.”