Even before this global pandemic shock, there has been a shift in thinking for how to best run a pension or sovereign wealth fund. There is movement from the classic strategic asset allocation (SAA) model to what is being referred to as the total portfolio approach (TPA). Sovereign wealth funds have been at the forefront of employing TPA, yet there has been limited description and discussion of this model.
The most accessible work has been done by Willis Towers Watson (WTW) through their Thinking Ahead Institute in "Total Portfolio Approach (TPA): A global asset owner study into current and future asset allocation practices". However, there is no standard definition or agreement of what is a TPA approach as made clear from the results of the WTW survey. It is an elusive target for analysis, no different than some discussions of the "endowment model". Nevertheless, the core thinking focuses on holistic goals with aligned interests of governance and management to dynamically achieve better performance.
WTW presents a simple comparison between SAA and TPA. The total portfolio approach embraces risk factors over asset classes and focuses on fund goals over a benchmark portfolio. Hence, effort is redirected to total return over alpha above a benchmark. The monitoring and governance of the portfolio also changes. Since a board is not monitoring the portfolio against well-defined benchmarks under TPA, the oversight or management flows more directly to the CIO. The board focuses on whether the CIO meets the overall portfolio return and risk goals.
More work needs to be conducted on this approach to make it better definable and measurable, but TPA may be more than just a fad. Both large and small firms are using it, and when faced with significant changes in the investment environment, this approach may be more responsive to shifts in the investment environment and increased uncertainty.