As more asset owners around the world begin transitioning their organisations towards the total portfolio approach (TPA), Australian super funds are sitting up and taking notice. But one challenge that many investors wrangle as they head towards TPA adoption is how to define its purpose.
University of Toronto finance Professor Redouane Elkamhi says that if he were to summarise TPA in one sentence it would be: “How to be prepared for different market conditions.”
“[TPA] means what team you have, what tools you have, what capability you have, and what mindset you have as a CIO or a CEO, so that you can face uncertainties,” Elkamhi, who is also a senior advisor to the chief investment officer and total portfolio group of Canadian pension giant Healthcare of Ontario Pension Plan, told the Fiduciary Investors Symposium in Harvard, hosted by Investment Magazine sister publication Top1000funds.com.
The ability to face uncertainties is one of the reasons that a larger number of Australian asset owners are embracing it. The $241 billion Future Fund was an early pioneer of TPA in the antipodes and says that, in the face of more geopolitical upheaval and macro volatility, investors must take “a more dynamic approach” to their governance arrangements, portfolio planning and positioning.
The likes of TCorp, Brighter Super and Aware Super are also moving towards it or have adapted aspects of TPA thinking to a Your Future Your Super-constrained world.
“You want to get the best performance you can but you have a number of constraints you’re dealing with – we generally run a fairly constrained tracking error, we’ve got a specific fee budget, there are degrees of illiquidity… we’re trying to build a portfolio subject to all of those and generate the best returns, but we’re not free to do what we like,” Brighter Super CIO Mark Rider told the Association of Superannuation Funds of Australia conference in 2024.
“We’re not the Future Fund where you could have a fee of 2 per cent; it wouldn’t look very good on a heat map. Members can pull their money out and get it back in three days… but that doesn’t stop you making decisions – do I want to be active or passive? Can I focus more of my risk and fee budget where I have a better chance of beating the benchmark?”
Elkamhi believes one of the most influential factors in the adoption of TPA is investors realising the flaws of benchmark-driven thinking.
“I think for the last 10 years, we became scapegoat of benchmarks,” Elkamhi said.
“For example, while asset owners realise the need for more geographical diversification compared to, say, the country composition in a global equities benchmark, their capacity to do so might be constrained due to risk budgets. The reason we talked about TPA so much is because there are structural… illiquidity and flaws in benchmark, and there are now new views about asset returns,” he said.
But the rise and rise of TPA – and the application of it to Australia’s unique asset owner landscape – means that definitions of what it is and how it works can differ dramatically between organisations.
But Elkamhi said there are four common characteristics of TPA across iterations: a philosophy of fund-wide decision making; an alignment of actions with total fund objectives; the breakdown of asset class silos; and the optimisation of capital and risk allocation within and across asset classes.
“Ask everybody, everybody will tell you we’re doing TPA these days. But look at what is the governance, what is the benchmarks, it’s going to come clearer to you guys,” he said.
Still, implementation of TPA comes with significant organisational challenges – but those pale in comparison to the problems of sticking with investment approaches that are quickly becoming outdated, according to James Davis, CIO of the US$19 billion OPTrust.
“When I joined, the one thing I noticed about OPTrust was we had super-skilled, talented and successful people, good performance, deep teams, but [we were] very siloed and the mission was missing,” Davis told the Fiduciary Investors Symposium.
“We saw repercussions of that, like hoarding of capital, a misunderstanding of risk and so forth. My belief was that TPA could make us better.”
But just like there’s seemingly no single definition of TPA, there’s also no single method of implementing it; each user will have their own requirements and have to think deeply about how they structure their organisation around it.
“For us, TPA is a journey. Every journey has a destination; for us that is plan sustainability,” Davis said.
“Being fully funded, having a stable contribution rate and benefits, sustainability is best measured by the level and the drawdown potential of our funded status. So the metric that matters the most is the funded status.”
Australian asset owners attending the Investment Magazine Fiduciary Investors Symposium will hear first-hand from US$351 billion California State Teachers Retirement System about the learnings from its own adoption of TPA.
