Many of the world’s largest institutional investors are shifting their investment strategy to a total portfolio approach and away from siloed investing, according to a report from the Chartered Alternative Investment Analyst Association.
Among them could soon be the $556.2 billion California Public Employees’ Retirement System, the largest pension fund in the U.S., which will decide in November whether to adopt the investment governance model. The philosophy behind the total portfolio approach, or TPA, is that investment decisions should be based on their contribution to the entire portfolio, rather than the strategic asset allocation approach of trying to meet asset allocation targets.
The CAIA report is based largely on interviews with CIOs of 12 institutional investors: the Alaska Permanent Fund; Dutch pension fund APG; the California Public Employees’ Retirement System; Canada’s CPP Investments; Australia’s Future Fund; the Government of Singapore Investment Corp.; New Zealand’s NZ Super; Canada’s Public Sector Pension Investment Board; the U.K.’s Railway Pension Scheme; Australia’s New South Wales Treasury Corp.; the Universities Superannuation Fund in the U.K.; and the State of Wisconsin Investment Board.
The report cited CalPERS as “a high-profile example of an asset owner that’s early and publicly in this mindset shift towards TPA,” adding that “it was the arrival of a committed CIO, an aligned board, and emphasis on collaboration and shared mindset that have now begun to enable deeper organizational change.”
CalPERS CIO Stephen Gilmore joined the fund in July 2024 as the organization’s fourth CIO in five years. Prior to that, he was the CIO at NZ Super, and prior to that, he was chief investment strategist at Australia’s Future Fund, both of which are cited in the CAIA report.
A 2021 report from the Thinking Ahead Institute on total portfolio thinking and practice argued for the new approach as “more efficient at delivering risk-adjusted returns and long-term outcomes.” It also noted that TPA could be implemented by internal investment teams or by outsourced CIOs.
The TAI also called asset allocation using TPA a CIO-centric process and wrote that strategic asset allocation and TPA exist on “a spectrum of portfolio construction approaches.”
The proposal for CalPERS to move beyond its current strategic asset allocation method, included in a September board memo, stated that a TPA “will provide management the needed flexibility to diversify and add value to the portfolio by making active management investments, or simply, non-reference portfolio investments.” The memo added that this will also mean “clear and transparent” management decisions.
If the new strategy is approved, the CalPERS board would no longer set asset class allocation targets and would instead set the overall “formal total fund risk,” according to the memo. This would create two new board decisions to select a reference portfolio and set an active risk limit. “To the organization, there would be operational and cultural changes to implement and manage, the most significant being to how investment decisions are made,” the memo stated.
This was reflected in the CAIA report, which identified the most challenging aspect of transitioning to TPA investing as “for investment teams to break down silos and focus on the overall portfolio.” It added that “this is neither comfortable nor easy, but over time, it should lead to better fund-level outcomes instead of just what’s best for a certain asset class sleeve.”
Related Stories:
Total Portfolio Approach: A New Way to Construct Asset Allocations
CalPERS Hires June Kim Away From CalSTRS as Deputy CIO for Public Markets
There’s a Better Way to Run Investment Teams, CPPIB Says
Tags: Asset Allocation, CAIA, CalPERS, Investment Strategy, Stephen Gilmore, Total Portfolio Approach