In music, artists like Prince, Taylor Swift and Beyoncé have changed the rules. They combine different styles to create something special and meaningful. These artists refuse to be confined by traditional labels, just as the Total Portfolio Approach (TPA) challenges the conventional constraints of Strategic Asset Allocation (SAA).
TPA applies this same principle to portfolio construction — prioritizing objectives, risks, and outcomes over predefined asset class labels. By focusing on the portfolio objectives, TPA opens the door to investments that investors might otherwise overlook.
A few years ago, we found a unique infrastructure debt strategy, which we considered an attractive addition to clients’ portfolios. Due to the nature of the strategy, it didn't fit neatly into an SAA defined asset class because it overlaps both real assets and private credit. However, it offered unique exposure to a thematic renewable energy trend.
In a traditional SAA framework, this opportunity would likely have been excluded for the following reasons:
In contrast, TPA’s collaborative and integrated structure enabled the real assets and credit teams to jointly conduct due diligence. As a result, the opportunity was added to clients’ portfolios, improving diversification and capturing thematic tailwinds.
Impact example: The introduction of the strategy improved many of the top-level factors we consider when managing portfolios, further illustrating the benefits of TPA. The radar chart below highlights several of these factors, including improved risk-adjusted return figures, albeit at the cost of liquidity.
Fallen angels are bonds that the credit rating agencies (S&P, Moody’s, Fitch) once rated investment grade, but were later downgraded to high yield, often because the issuer’s financial health declined. When this happens, prices often drop sharply. As selling pressure fades and companies work to regain their investment grade status, prices typically rebound to fair-market value and can often result in positive returns for investors that buy early. This is known as the “Fallen Angel effect,” which can create a unique investment opportunity for two main reasons:
In 2020, amid the market volatility caused by the COVID-19 pandemic, the BBB corporate bond segment (bonds with the lowest investment grade rating) had grown substantially and companies were borrowing more than before the pandemic — both tailwinds for a strategy that capitalizes on the fallen angel effect.
Given these tailwinds, we partnered with an investment manager to design a strategy that captured the fallen angel premium. Our investment thesis played out as expected: a wave of downgrades occurred in mid-2020, followed by a market recovery that benefited this strategy. Over the first 12 months of investment, the fallen angels index outperformed the high-yield index by 4.3% — highlighted in the chart below.
This strategy works best in a TPA framework, but it's an unlikely strategy under an SAA framework for the following reasons:
Catastrophe bonds, commonly referred to as “cat bonds,” are structured financial instruments that allow insurers to transfer specific risks associated with natural or man-made disasters, such as hurricanes or earthquakes, to investors in the capital markets. By purchasing these bonds, investors assume the risk of catastrophic events in exchange for potentially higher returns. The popularity of cat bonds is growing because of:
As weather and disasters are not correlated to or dictated by markets or economics, catastrophe bonds provide strong diversification benefits relative to traditional asset classes, making them appealing in multi-asset portfolios. Looking ahead, the opportunity is supported by cyclical dynamics: after major loss events, demand for protection rises while supply decreases push premiums higher.
Cat bonds don’t fit well in an SAA approach because of their uncorrelated nature, lack of a benchmark fit and their deviation from conventional debt instruments. However, TPA’s flexible framework allows for their inclusion. They were incorporated as part of a broader strategy aimed at enhancing the portfolio’s return distribution and portfolio diversification given their uncorrelated returns relative to traditional asset classes.
Just as genre-bending music invites listeners to experience sound in a more fluid and expressive way, TPA empowers asset owners to invest with greater creativity, responsiveness and alignment to their goals. Investments like infrastructure debt, fallen angels and catastrophe bonds may not find a home in traditional SAA frameworks. But under TPA, investors can evaluate them on merit and contribution to the total fund's objective. In a world where markets are increasingly complex and interconnected, embracing TPA is like discovering a new musical language, one that harmonizes innovation with intention and performance with purpose.
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