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.
This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers and employees (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. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. 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. WTW does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R.§ 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.
This document is based on information available to WTW at the date of issue, and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document WTW has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without WTW’s prior written permission, except as may be required by law. Views expressed by other WTW consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by WTW, whether for its own account or on behalf of others, may differ from those expressed herein.
