Trends in asset allocation: The rise of a total portfolio approach

For decades, strategic asset allocation (SAA) has been the foundation of portfolio management – aiming to balance asset classes to meet long-term return and risk objectives. This optimization process weighs the expected risk and return of individual asset classes to identify the most appropriate SAA. Its straightforward framework brought clarity and accountability to governance by defining total portfolio performance benchmarks. It also spurred growth in investment consulting, as firms built advanced allocation models, manager research capabilities and independent performance measurement tools to support institutional investors in constructing SAAs and selecting asset managers.

One approach gaining significant traction amongst the larger investors is a total portfolio approach (TPA) – a holistic, dynamic approach that aims to treat the entire portfolio as a single, integrated entity. This article considers how TPA differs from SAA and which investors are currently best positioned to take advantage of an integrated TPA.

Recap on SAA

SAA involves setting long-term target weights for various asset classes in a portfolio based on an investor’s objectives, risk tolerance and investment horizon. For decades, a 60% equity and 40% fixed income portfolio was a common SAA example, while larger institutional investors also incorporated alternative investments such as private equity, commercial real estate and infrastructure.

The SAA framework remains a widely adopted approach for developing long-term investment strategies. Its appeal lies in its intuitive structure and the quantitative discipline it brings to forecasting returns, volatility and correlations across asset classes. Additionally, the framework supports diversification by leveraging the complementary characteristics of different asset classes.

However, a common critique of the SAA is the disconnect between asset allocation design and manager selection. Since these processes are often conducted separately, several inefficiencies may arise:

• The realized portfolio risk-return profile may deviate from the intended strategy,
• Diversification benefits within multi-manager asset classes may be limited, or
• Opportunities to introduce or increase exposure to beneficial asset classes may be delayed due to the formal review process required for changes.

For instance, increasing allocations or adding new asset classes typically necessitates a formal asset mix review, which can slow the implementation of enhancements or responses to evolving market conditions. Nevertheless, this structured approach also offers a key advantage: it keeps investors focused on long-term objectives and helps avoid overreacting to short-term market fluctuations.

What is a TPA?

Unlike the traditional SAA model, where asset classes are managed in silos, the TPA views the portfolio as a single, integrated entity. Under a TPA, the portfolio continues to invest in the same asset classes. However, the process for gaining exposure to these assets changes, allowing for greater allocation flexibility driven by risk factor analysis of the overall portfolio’s risk and return profile. Investment decisions are assessed based on their marginal impact on the overall portfolio’s risk-return profile, rather than their performance within individual asset classes. This integrated approach offers several advantages:

• Enhanced agility in responding to market dynamics,
• More efficient capital allocation based on relative opportunity at the total portfolio level,
• Diversification decisions based on broader risk factors, and
• Leveraging cross-asset expertise from diverse investment teams.

However, adopting the TPA model requires substantial changes to an organization’s governance structure and investment culture, as well as significant data and technology requirements to undertake integrated risk factor analysis to support the approach. As a result, it has primarily been implemented by large, global public investors such as CPP Investments (Canada), Future Fund (Australia), GIC (Singapore) and New Zealand Superannuation Fund. These institutions benefit from large, globally integrated investment teams that facilitate collaboration across asset classes.

While the TPA model is often associated with internal management, a precursor to this concept emerged in the 1990s. Bob Hamje, then Chief Investment Officer for the TRW pension assets, pioneered a total portfolio mindset using external managers. What set this model apart was the asset managers were compensated based on total portfolio performance, not just their individual mandates, and managers were expected to recommend adjustments to their capital allocation based on their conviction and contribution to overall portfolio returns.

This early model laid the groundwork for today’s TPA philosophy, which began to take formal shape around 2006 and has since evolved.

Governance and culture differences

As previously noted, adopting a TPA requires a significant cultural shift – from managing investments in asset-class silos to embracing a unified portfolio model. This transition also demands that boards and investment committees be willing to delegate more decision-making authority and that robust tools be in place to measure and assess risk factor exposures.

Culture plays a critical role in determining success across any industry, yet it is often difficult to define. In the context of a TPA, the cultural shift involves fostering collaboration across investment disciplines and aligning incentives with total portfolio performance. Not all investment professionals may be comfortable with this change.

The governance model under a TPA requires strong conviction from boards and investment committees that a unified investment model can deliver materially better outcomes than a traditional SAA approach. While board oversight remains essential, the TPA differs in its use of a reference portfolio – a simplified, policy-oriented benchmark that reflects the investor’s long-term objectives, risk tolerance and return expectations. This reference portfolio typically comprises traditional, liquid asset classes such as global equities and fixed income.

Risk factor analysis plays a central role in a TPA by decomposing the total portfolio into risk factors. It allows investors to control unintended concentration risk, as well as allowing for easier consideration of “what if” scenarios on how the total portfolio would be impacted under different macroeconomic or market conditions. The risk factor lens also helps boards and committees to better understand exposures for their oversight responsibility.

The table below highlights key differences between SAA and TPA:

Source: Thinking Ahead Institute

Investors currently operating within an SAA framework can progressively incorporate elements of the TPA by taking the following steps:

• Reframe the investment objective to align with total portfolio outcomes.
• Develop a unified risk dashboard to consolidate exposures across all asset classes.
• Enhance capital allocation flexibility using completion mandates.
• Establish a centralized decision-making body, such as a total portfolio sub-committee.
• Invest in advanced tools and data infrastructure to support risk factor analysis and portfolio integration.

Conclusion

As institutional investors navigate increasingly complex and dynamic markets, the TPA offers a compelling evolution beyond traditional SAA. By shifting the focus from siloed asset class mandates to a unified, outcome-oriented framework, a TPA enables more agile, efficient and risk-aware decision-making. However, this transformation demands a fundamental shift in governance, culture and capabilities. Institutions that can foster cross-functional collaboration, embrace risk factor thinking and empower investment teams with the right tools and authority are best positioned to unlock the full potential of a TPA. For investors currently operating under an SAA framework, but constrained by asset size, resources or governance structure, there remain meaningful opportunities to gradually integrate elements of a TPA over time.