TPA empowers strategic, flexible, and high-impact investing
Whether your preferred medium is a cassette tape, a CD, or streaming, when it comes to music, we are all in pursuit of the same holy grail: The Perfect Playlist. But what does perfect really mean? The perfect playlist is constantly changing based on mood, preference changes, our lived experiences, innovation and collaboration. At any given point in time, our goals might be different. We might be trying to evoke an emotion, convey a message, or just survive a 30-minute jog. Regardless, your approach to creating a playlist must be flexible and fluid. You may select from various genres, various artists, and various eras to find songs that flow well together and share similar themes, all in the spirit of meeting your goals.
Taking a Total Portfolio Approach (TPA) is not unlike curating the perfect playlist. In TPA, asset owners take a holistic view of a portfolio’s ultimate objectives, looking past traditional constraints, such as asset class buckets that must be filled. Asset owners consider the current environment and full opportunity set to optimize the total portfolio’s exposures to various risk and return drivers.
TPA has been core to our investment philosophy at WTW. Our investment process has evolved over the last 40 years, with our focus on TPA growing over that time. Let’s take a closer look at what TPA is, how it can be implemented, and how it can add value through some common questions.
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TPA is a portfolio construction framework that considers all assets, liabilities, and objectives of the asset owner. It focuses on achieving financial objectives by integrating a range of factors rather than just improving individual asset allocations. Investment decisions are guided by first defining the asset owner’s goals. In TPA, assets compete for capital based on their ability to support the owner’s objectives, recognizing that assets can serve multiple purposes. TPA is gaining interest and adoption globally as investors look to improve upon the traditional strategic asset allocation (SAA) approach.
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| Characteristic | Strategic Asset Allocation (SAA) | Total Portfolio Approach (TPA) |
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TPA offers flexibility by dynamically adjusting asset allocations based on market conditions, economic forecasts, and evolving investor objectives, incorporating a wider range of asset classes and strategies for real-time adjustments. In contrast, SAA is more rigid, with fixed allocations that change only at predefined intervals, typically through rebalancing or major shifts in investor goals. In terms of quantifying the advantage, the Thinking Ahead Institute estimated TPA could add 50 to 100 basis points of value annually over SAA.[1] A 2024 WTW survey found that asset owners practicing TPA outperformed those using SAA by up to 1.8% p.a.[2]
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TPA approach requires strong leadership and collaboration across teams. Roles of individual team members, how their contributions are measured, and performance reporting are more straightforward with traditional SAA models. TPA also demands specialized expertise and may lead to over-optimization or excessive trading when attempting to time the market.
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Benchmarking a TPA portfolio involves a custom, composite benchmark that accounts for the entire range of asset classes and investments in the portfolio. It focuses on risk-adjusted returns and performance attribution. Benchmarking an SAA portfolio is more straightforward, using a fixed-weight benchmark composed of broad asset class indices, and the goal is to assess whether the portfolio is achieving the target returns based on its long-term allocation.
Consider a pension plan taking an SAA approach; there is a possibility that the portfolio assets outperform the SAA benchmark, but if the plan’s funded status deteriorates over the period, claiming “success” could appear misleading or misguided.
It is important to note here that most TPA investors use a blended benchmarking approach to measure progress and success and provide a more holistic view of how the investment program is performing.
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Investors adopting the TPA approach include large public and private pension funds and sovereign wealth funds across North America, Europe, Australia, and East Asia, such as CalPERS, the New Zealand Superannuation Fund, and the Canada Pension Plan. While SAA remains the dominant approach, more asset owners are transitioning to TPA, with CalPERS making the switch earlier this year.
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Changing organizational thinking and approach takes time and focused effort by an organization. For this to happen, there needs to be strong leadership in place to help adopt the change. The changes are not just structural, they are also cultural, as people need to adopt a different mindset.
The steps to transition from SAA to TPA include:
A lot has been presented in this piece in favor of TPA and the potential benefits of adopting it as a framework. But it is critical to remember that TPA is not as simple or as fast as streaming a song that came to mind. TPA lives on a spectrum along with SAA, and movement from SAA toward TPA can be continuous and gradual, but it must be done with aligned interest, organizational context, and thoughtfulness. Over the next several months, we hope to introduce further thought pieces to explore different aspects of TPA and how you might start to build your own perfect portfolio playlist.
Towers Watson Australia Pty Ltd ABN 45 002 415 349 AFSL 229921 (“WTW”) has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by 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. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken based on its contents without seeking specific advice.
This material is based on information available to WTW at the date of this material and takes no account of developments after that date. In preparing this material we have relied upon data supplied to us or our affiliates by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors, omissions or misrepresentations by any third party in respect of such data.
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