Total Portfolio Approach (TPA) is an approach that WTW had adopted early in how we think about implementing portfolios, but it didn’t just “happen” overnight. Like any enduring idea, our understanding of TPA and the subsequent papers we wrote on the subject were shaped by our own observations, experience, trial and error, and the support of asset owner partners who joined us on the journey.
After working in consulting for two decades, I can confidently say that strategic asset allocation (SAA) is ubiquitous across most of the clients I work with. It fits the idea of clear accountabilities and separation of duty. The Board sets investment policy and the investment team focuses on implementation. Investment teams wait anxiously to hear how the SAA dictates their allocation and deployment that year. Success is measured as alpha above mandate benchmarks in neat asset class rows. The governance and associated incentive structures couldn’t be cleaner.
However, as the world of investing becomes more complex, SAA models more intricate, and the requirements for the Board to be on top of an ever-expanding list of interconnected asset classes, cracks in this façade inevitably show. Today, I still work with clients who tirelessly seek the magic top-down number for sub-asset class A or the proxy benchmark that best represents asset class B. While those with a quantitative mindset may find clever workarounds to solve the technical aspects of this issue, the fundamental problem remains—today’s investment environment has stretched traditional SAA governance models beyond the point of effectiveness for most Boards.
Enter Total Portfolio Approach or TPA—also known as ‘one-portfolio approach.’ TPA is neither model nor method, but rather a term used to encapsulate a different approach to investment strategy. One that is arguably more about changing the governance, culture, and how people are incentivised rather than a fancy way of modelling assets. There is no definition for TPA in academic literature, but practitioners often point to Canada and New Zealand as early adopters of the approach. In both cases, the main motivation for the shift in approach was to change the governance model in a way that would enable more effective and innovative asset management. However, no change comes without risks, and the innovation that was TPA was only made possible because early adopters believed the benefits outweighed the risks.
Three key reasons for adopting TPA
Alignment
Addressing alignment issues between alpha and beta, where there was tension between the two areas, when in fact the two should be integrated as part of a common total fund objective.
Framing
Addressing framing issues around the SAA, as non-conventional or new ideas often fell between the cracks because they didn’t fit existing asset class buckets.
Cost
Addressing opportunity cost issues associated with static SAA frameworks which failed to adapt to changing market conditions, resulting in suboptimal risk-return trade-offs.
Recognize that adopting TPA is a change management process, and one that requires bold leadership and vision.”Jayne BokHead of Investments, Asia
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Disclaimer
This document was prepared for general information purposes only and should not be considered a substitute for specific professional advice. In particular, its contents are not intended by WTW to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.
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| Title | File Type | File Size |
|---|---|---|
| Total Portfolio Approach: Is it right for you?PDF | 4.3MB |
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