Not every institutional asset owner can explore the benefits of a “total portfolio approach” (TPA) due to the strain it puts on an investment team’s efficiency, but for those that can afford the luxury, it can bring both rewarding portfolio diversification and organisational culture.
That’s the view of Ben Samild, CIO of Australia’s $212 billion Future Fund, which is a well-known advocate for TPA, or what it calls a “joined-up whole-portfolio approach” – as distinct from the strategic asset allocation (SAA) approach taken by many super funds.
Contributing to a CAIA Association global report on TPA, Samild said the approach’s optimisation advantage is massive.
While a sector team in an SAA approach will aim to achieve the best diversification within the asset class and its annual budget, there is a risk of over-diversification at the portfolio level, he said.
“But in a joined-up whole-portfolio approach, diversification is achieved across the portfolio by seeking the best expression of a given characteristic such as equivalent equity exposure (EEE), currency, risk or expected return,” he wrote.
“Asset classes and the teams who manage them are engaged in constant competition for the best ideas.”
With that said, Samild admitted that the investment process can feel Sisyphean and “demanding” at times.
“… [A] joined-up whole-portfolio investors should be asking themselves daily if, given the discounted probability of future investment environments, the current portfolio composition is best to meet their respective mandate going forward,” he wrote.
“Each of the elements of the joined-up whole-portfolio approach are designed around optimising the total portfolio—as opposed to efficiency of operations or efficiency for the individuals in the process.
“While investment teams may have relative freedom to pursue and develop an investment opportunity, they need to do this with enough understanding of what is appropriate in the context of the whole portfolio and be prepared to size the opportunity at a scale that would be uncomfortable in sub-portfolio optimisation.
Thinking on a spectrum
Other global asset owners who are known to adopt a TPA approach include Canadian pension fund CPP Investments, Kiwi sovereign fund NZ Super, and Singapore’s GIC. Locally, NSW sovereign TCorp also shares the philosophy.
A Thinking Ahead Institute (TAI) analysis considered SAA and TPA’s characteristics as sitting on two opposite ends of a spectrum. While acknowledging the spectrum involves a certain degree of simplification, TAI said moving from SAA to TPA broadly reflects greater levels of conviction within a fund.
But it is important to note that SAA and TPA portfolios are often not either/or. This is because while many asset owners may be willing to embrace an overall “total portfolio thinking”, the extent to which they are able to actually do so is influenced by factors such as their governance, people and investment models, TAI said.
For example, Australian Retirement Trust CIO Ian Patrick is one investment leader with a non-TPA portfolio who previously flagged the willingness to facilitate more “joined up” thinking in his merged QSuper and Sunsuper investment teams. But he said the super fund’s multiple investment solutions on offer will make a Future Fund-like TPA approach difficult.
In terms of broader organisational culture, Samild wrote in the report that one downside of TPA is that its implementation becomes more challenging as the fund grows.
“At Future Fund, it guides the organisation away from geographic spread such as overseas offices because of the difficulty in maintaining constant interaction across time zones.
“It also favours outsourced investment management to keep team numbers of a size that allows frequent interaction with other teams and a sense of connectedness to the whole portfolio.”
However, reiterating the sentiment he first expressed at Investment Magazine Fiduciary Investors Symposium last year, Samild said TPA fosters a better culture through knowledge sharing within the organisation.
“While sometimes taxing on the individuals involved, my experience is that it is incredibly rewarding,” he wrote.
“[It] brings joy to my job as we come together as a team to talk about what is going on in the world and seek to build the best portfolio to meet the mandate going forward.”
