The total portfolio approach (TPA) has captured the attention of asset owners throughout Australia and the Pacific, with the likes of the Future Fund and New Zealand Super touting its benefits for navigating the volatility that has recently gripped markets as a result of geopolitical and macro uncertainty.
Under recently-appointed CIO Scott Chan, the US$350 (circa A$537 billion) billion California State Teachers’ Retirement System (CalSTRS) – the largest educator-only pension fund in the world – has recently begun moving to the total portfolio approach, which it badges the “one fund approach”.
“We talk about aligning all of our decision-making objectives to a single portfolio – the total fund – and changing investment processes and the way we do things to orient away from what was historically more of a siloed approach,” CalSTRS senior portfolio manager Josh Diedesch told the Investment Magazine Fiduciary Investors Symposium in the NSW Blue Mountains.
While CalSTRS has “great teams” across every asset class, they tend to focus their attention on those asset classes, and there are investment opportunities that don’t fit neatly into them or align with the objectives of individual teams.
“So how do we take advantage of them? They may not make sense in a sort of siloed view of a particular asset class team, but in the total portfolio they provide a big benefit – improving risk-adjusted returns.”
Some of those opportunities might be in climate or energy transition-related investments, where they could look like anything from venture capital to high quality credit and everything in between, and CalSTRS wants to be able to participate in them “anywhere along the investment spectrum and in the capital stack”. CalSTRS approaches private credit in the same manner, while other asset owners have a set view of where it fits into the portfolio.”
“Having this one fund approach, we don’t necessarily know exactly where a given investment should fit, but we know it’s a good investment for the fund, so we’re going to do that, and we can accommodate that through this one fund approach.”
Funds that are considering TPA need to be clear on what their objectives are, the language they’ll use to describe it and what they hope to get out of using it and the language the before they make the leap, Diedesch said.
“I think that helps support the change management because with this, like anything else, you sort of face all the same challenges; some people are quicker to adopt and understand and others are slower, and you sort of need to accommodate that and bring people together to talk through that.”
“(Then there’s) separating the human behavioural problems from the technical problems that you face around systems and data and getting common understanding and buy-in.”
Diedesch works in the Total Fund Management Division (TFMD), which is “relatively new on paper” – it was created on July 1 – but technically represents a formalisation of the responsibilities held by predecessor groups, including Investment Strategy and Risk and Innovation and Risk, and has become the “central hub” for asset allocation and balance sheet and risk management.
“Thinking about a fund like ours that’s mature, we have a reasonably large allocation to illiquid assets,” Diedesch said.
“We are a mature pension fund with negative cash outflow as well. So how do we think about managing our liquidity through market cycles? Having this TFMD as a hub for facilitating liquidity management and capital allocation, working with all the teams, we can come together and think about that rather than each team going off and making investment decisions and capital budgeting without the context of the total fund liquidity.”
Diedesch said that having those functions centralised under the TFMD had been a boon for helping CalSTRS navigate recent bouts of market volatility.
“We all know that we’re going to experience periods of volatility; we don’t know ahead of time what they’re going to be,” Diedesch said. “It could be geopolitical or otherwise.”
“(But) when we were making some policy changes to facilitate this, we talked about wanting to have flexibility through different market environments, and we’ve certainly experienced quite a bit of volatility over the last few months… and if we see opportunities where we want to invest, we can do that, and we’ve sort of built in the processes and the flexibility to do it.”
