A profound transformation is quietly unfolding in the traditionally conservative world of sovereign wealth funds and public pensions, as a new investment philosophy called the "Total Portfolio Approach" (TPA) emerges—potentially rewriting the rules for managing trillions in assets. This method discards traditional asset-class silos, advocating for portfolio-wide optimization rather than isolated decision-making by asset category.
The spotlight now falls on the California Public Employees' Retirement System (CalPERS), the largest U.S. public pension managing $587 billion, which will vote this month on adopting TPA. The decision is pivotal, as it could mark TPA’s breakthrough among mainstream institutional investors.
If approved, CalPERS would join pioneering global institutions like Singapore’s GIC, Australia’s Future Fund, and Canada’s CPP Investments, which have already embraced TPA. These entities argue that TPA better suits today’s volatile markets—where inflation spikes and geopolitical shocks can upend assumptions—than the traditional Strategic Asset Allocation (SAA) model.
For large asset owners, adopting TPA demands sweeping cultural, governance, and infrastructural changes. While skeptics dismiss it as another investment acronym, proponents believe TPA enhances portfolio flexibility and resilience against future uncertainties.
**CalPERS’ Turning Point** At a September board meeting, CalPERS’ new CIO Stephen Gilmore outlined the rationale for TPA. He noted that under SAA, asset-class teams optimize in isolation, potentially creating unintended risk concentrations or overdiversification. "Optimizing individual asset classes and summing them up is less effective than optimizing holistically," Gilmore explained.
CalPERS’ proposal shifts from 11 siloed benchmarks to a single "Reference Portfolio" of 75% equities and 25% bonds, with a 400-basis-point active risk budget. Gilmore cited TPA adopters’ outperformance: a 2024 report by Willis Towers Watson and the Future Fund showed TPA funds delivered 1.8% higher annualized returns over the past decade versus SAA funds.
**TPA’s Flexibility Edge** TPA’s core strength lies in unparalleled flexibility. CPP Investments’ Manroop Jhooty noted it enables trade-offs that are "tricky" under SAA. For instance, if private equity’s allocation rises from 15% to 20% due to valuations, SAA investors might face forced rebalancing in illiquid markets. TPA funds, however, can treat public equities and private equity as similarly risk-driven assets, adjusting exposures by trimming liquid stocks instead.
TPA also mitigates unintended risk concentrations. When themes like AI surge, multiple teams—from infrastructure to public markets—may invest independently, creating dangerous overexposure even if allocations stay "in bounds." New York City Retirement Systems exemplifies this shift, hiring quant managers since 2022 to track portfolio-wide risks like liquidity sensitivity.
**Governance Hurdles and Skepticism** Despite its merits, TPA implementation faces challenges. Governance restructuring is key: SAA’s clear benchmarks per asset class give way to broader team discretion under TPA. Max Townshend of Local Pensions Partnership Investments warned, "You risk losing accountability for whether security selection or asset allocation actually adds value."
Willis Towers Watson’s Jayne Bok cautioned against "pretend" adopters who skip cultural overhauls. Meanwhile, definitions vary—some view TPA as revolutionary, others as an SAA upgrade. Ares Management’s Avi Turetsky called it "more aspiration than system," lacking Canada’s mature framework.
**Lessons from Practitioners** Early adopters offer insights. Gilmore, formerly with New Zealand Superannuation Fund (NZ Super), brought TPA experience. NZ Super initially staffed generalists; as assets grew, it organized around five asset-class teams but added a tactical overlay to assess fair value across holdings.
"TPA lets us move the portfolio more dramatically," said NZ Super’s Brad Dunstan, breaking down silos to align goals: "Everyone pulls in one direction—no infrastructure team member says, ‘I’ll invest here just because it’s my baby.’" This cultural synergy epitomizes TPA’s ultimate aim: unified action for collective gain.
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