Asset owners are increasingly shifting away from a strategic asset allocation approach to a more dynamic total portfolio approach, as it allows them to act quickly on opportunities and more closely tailor their portfolios to specific goals, some experts have argued.
A TPA strategy – in which the best ideas from a team operating collaboratively compete for capital constantly – can better position funds for an increasingly complex investment landscape as shifts in technology, demographics and social norms drive enormous changes in long-accepted investment methodologies, argues Tim Unger, a senior investment consultant at Willis Towers Watson.
Speaking at the CIMA Society of Australia Conference 2018 in Sydney on November 1, Unger said most funds were somewhere on a sliding scale between the two approaches but that the trend was increasingly towards TPA strategies.
The traditional SAA approach is based on a set meeting schedule that is only loosely connected to the fund’s investment goals, he said. Strategy is updated infrequently as decision rights reside with the board and only some implementation decisions are delegated to the executive team. It involves setting asset buckets that need to be filled, with less room for deviation from rigid weightings.
A TPA strategy, on the other hand, has a continuous, dynamic focus on achieving the fund’s investment goals. While the board often sets the risk budget, decision rights reside with the CIO and executive team, and the portfolio is managed in real time as investment opportunities compete for capital and only the best ideas make it into the portfolio.
TPA has a number of strong advantages, Unger said. It allows funds to act quickly on opportunities and helps build better portfolios, as allocations are made based on risk exposures rather than rigidly defined asset classes. This opens up a greater opportunity set and allows a greater focus on achieving the fund’s stated mission and goals, as opposed to focusing narrowly on outperforming benchmarks or peers.
Also, decision-making rights reside with the teams that are best qualified to make those decisions, Unger said.
“It’s not that an SAA-based approach can’t incorporate any of these advantages, it can, it’s just that a TPA approach that’s done well, I think, gets a better quality on each of these particular advantages,” Unger said. “So it’s no surprise a lot of funds are talking about trying to move along that spectrum…to take more of a TPA approach in how they build their portfolios.”
It also allows funds to tailor each investment around issues such as sustainability, diversity and culture, Unger said, quoting research from the World Wildlife Fund that showed humanity had wiped out 60 per cent of mammals, birds, fish and reptiles since 1970.
“There is no point managing assets for the future if there is no future,” Unger said.
Building a best practice organisation requires sufficient time spent on organisational design and defining the organisation’s culture, beliefs and mission, he said. This is often neglected, as evidenced by the controversy that’s gripping the superannuation industry in Australia.
“It might sound completely obvious that funds should have a g ood understanding of their mission but I think you only have to look at what’s happening in Australia at the moment to have an understanding that perhaps missions are not particularly well understood or communicated throughout the organisation,” Unger said.
Mine Super CIO David Bell said he felt like a “kid in a candy shop” after a restructure that took more than half a year and completely overhauled his fund’s investment process to more closely align it with the TPA model Unger outlined.
The restructure created much more flexibility to tailor options to suit members with different circumstances, such as tax requirements for people in their accumulation phase versus retirees. It also created the ability to better differentiate “stable” from “aggressive” investment choices.
“What’s most exciting is that model can bring new investment ideas into our portfolio,” Bell said.
Twice a week, the asset allocation team and the management research team get together and share ideas.
“We’re just throwing ideas out there, the projects that we’re working on, and then we’re trying to marry [them with] the insights from the managed research team; it could be an idea on a new sector, or a new piece of private credit…We’re trying to say, ‘Does this have the opportunity to improve any of our portfolios for our members?’ So there’s this interaction and dynamism that’s going on.”
Bell said one key lesson from the transition to TPA was that bringing the fund’s staff along for the journey was more challenging than he expected and required a significant focus on retraining and education.
“Probably the piece I underestimated was the challenges of changing the roles people had,” Bell said. “I think everyone has gone into it with the right mindset but if [someone has] done one role 15 or 20 years, and really feels they have a lot to offer in that role, some reflections would be that you have to [the person] on that journey, not just say, ‘Hey, this is exciting for you.’ You have to address the areas that might be concerning them.”