The wild market swings seen in the last few weeks, and the chaotic geopolitical environment that created them, mean more investors might start implementing the total portfolio approach (TPA), according to Jon Pliner, the new global chief investment officer of TPA pioneer WTW.
“What we see with a lot of our clients is an increased utilisation of diversification,” Pliner tells Investment Magazine.
“And if you think about the last decade it’s really been a market where diversification didn’t work because equity markets were quite strong up until 2022, you had credit or fixed income markets that had very low yield but didn’t have a lot of movement. And so you would think that was a very difficult market for TPA. But in reality, what we saw, and the data that’s come through from our peer study, is that over the 10 year period, those investors that utilised TPA outperformed those that didn’t by 130 basis points.”
“If you’re following the TPA approach as you get into a different market environment, one with higher volatility and higher interest rates and more uncertainty, that allows you to be more dynamic in how you think about your portfolio – not requiring you to just fill the buckets of your strategic asset allocation, but really find those opportunities that fit what you’re trying to achieve and help you get the right risk-adjusted return in the portfolio as a whole.”
TPA is defined by competition for capital, and a more nimble approach to investing enabled by a “joined up” view of an investor’s assets, liabilities and objectives. Locally, it’s been implemented by the likes of the Future Fund and New Zealand Super, with the former repeatedly warning over the last few years that investors must rethink their approach if they want to thrive in a different market environment.
And it seems that different market environment has arrived. Investors aren’t just dealing with the short-term volatility created by Trump’s trade policies, but the longer-term shifts in the geopolitical and macroeconomic world order that those policies are symptomatic of.
“Right now we’re certainly in an environment with a lot of change going on, whether that’s the explosive growth of artificial intelligence over the last few years, impacting markets but also impacting how we work, how we think about data, how we utilise data, or whether that’s increased risk from geopolitical tensions – trade wars, or conflict in the Middle East, or conflict between Russia and Ukraine or wherever else there could be,” Pliner says.
“So we’re ensuring we continue to take those things into consideration. How does that impact markets? Oftentimes, geopolitical and economic viewpoints don’t have direct market implications, but we can see – whether that’s today or the most recent (historical) example of Covid in 2020. And we’re seeing that with the second Trump administration and a lot of uncertainty around trade policy and how that’s impacting markets.”
Australia’s superannuation funds have begun to embrace TPA, with the likes of the $170 billion Aware Super retooling its internal investment platform and data collection to make it possible and Brighter Super applying some of its tenets despite the constraints of RG97 and Your Future, Your Super.
But while lots of investors adopting the same asset class or investment strategy tends to see the alpha they can derive from it decay, Pliner says that every fund that uses TPA will get a different outcome.
“If you think about TPA, it is very specific to the individual investor and what their objectives are,” he says.
“And so you don’t end up with everybody owning a 60/40 portfolio because that’s the easy benchmark to utilise; it means you’re focussing on what your needs as an asset owner are, and what you’re trying to achieve, and finding the best strategies for achieving that from a portfolio standpoint – and that could look very different for portfolio A versus portfolio B with just a small tweak in what your objectives and constraints might be.”
WTW began its own journey towards TPA back in 2010. And while it’s pleased with how TPA has flourished around the world – and that there are plenty of investors now rushing to use it – Pliner says they should think carefully about the complexity it can bring into their organisations.
“The growth of it is great… we certainly think it’s a great way to invest and we do think that there is outperformance garnered from it,” he says.
“That being said, it is difficult. There is additional complexity in thinking about your team, and not having siloed investment teams across each asset class just filling their own box but really thinking about the portfolio as a whole.
“And so, recognising that it is a continuum, that there is a spectrum that’s not one or the other, but that there is a way to move from an SAA framework towards TPA in the mindset and in your thinking as an organisation – we think that’s going to continue.”
