TPA - Total Portfolio Approach - Is this a fad?

 

I am trying to understand the relatively new concept of the Total Portfolio Approach (TPA), which is being embraced by many large pension funds and endowments. Now, we know the foundations of SAA (Strategic Asset Allocation) and TAA (Tactical Asset Allocation), but there does not seem to be a clear definition of TPA.

SAA is structured around an investment committee allocating capital to major asset classes based on expected returns for each class. This is a long-term perspective, and in the short run, it will be applied for the year. TAA is a short-term. Both of these involve a top-down process in which the focus is on identifying asset classes and then making assumptions about future returns, volatility, and correlations to determine a set of portfolio weights. The allocations are then given to specific investment groups that aim to beat the benchmarks for each asset class. The investment committee monitors the performance and the weight for each asset class. The foundations of this approach are modern portfolio theory, with a focus on diversification. 

The reality is that many endowments have not been able to beat their SAA portfolio benchmarks, and the benchmarks themselves have not been effective because the underlying return and risk assumptions have proved ineffective. The process does not seem to work, so there is room for an alternative approach.

The new approach is the total portfolio approach, which still embraces diversification and modern portfolio theory. It also embraces the idea that allocations should be more flexible, drawing on the principles of tactical asset allocation. Still, there is no new theory behind the concept.

There is a belief that allocations should be more flexible and that endowment portfolios should not be siloed into fixed asset-class weights. There is a shift in investment staff to compete for capital across all asset classes. It argues that siloed thinking will not be effective for generating alpha or for adjusting to a dynamic market environment. TPA is more of an approach to managing the portfolio and not setting goals. The objective is to maximize surplus (assets - liabilities), subject to a downside or volatility constraint on surplus risk. 

This all sounds good, but it is not clear that there is a single acceptable definition of the concept. Hence, TPA may be in the eyes of the beholder.