Asset owners using a traditional strategic asset allocation approach (SAA) are facing a tougher investment environment that the total portfolio approach (TPA) – with its more flexible mindset and way of unlocking capital – is well-equipped to handle, according to Jeffrey Chee, head of portfolio strategy at WTW.

“If you want to invest in a reference portfolio or bulk market beta, there is a need to generate additional returns out of your investment process and in an increasingly complex and uncertain environment, that’s becoming challenging for investors,” Chee told a Thinking Ahead Institute event in Sydney on Tuesday.

Research by WTW’s Thinking Ahead Institute suggests that TPA can add between 50 to 150 basis points of return above an SAA approach.

“[In traditional SAA] the way that active risk is usually thought about is in asset class silos, sizing asset classes where active risk is unavoidable – real assets, private markets, hedge funds – in terms of potential for those asset classes to cause underperformance of the portfolio,” Chee said.

“This is most acute in superannuation, where the Your Future Your Super test looms large, but it’s still kind of evident when you look at portfolios for any investor that adopts an SAA approach.”

What investors should be doing instead, Chee said, is thinking about how they can rely on investment skill collectively to achieve their objectives.

“What that does is unlock the ability to allocate more to alternatives, and the ability to be more nuanced and more thoughtful and more concentrated in the way you design active mandates.”

Another aspect of TPA is thinking about dynamism and flexibility in a “broader sense” than just dynamic asset allocation (DAA) and strategic tilting, including by looking for risk dampening exposures in different asset classes – embedding duration into asset classes like real estate and infrastructure, or thinking about currency at the total portfolio level rather than as a hedge for a particular amount of the global equities exposure.

“The second element is thinking about dynamic asset allocation in terms of not just long-short tilting, but medium term opportunities. There are a number of strategies and asset classes that don’t fit naturally into asset class buckets and aren’t compatible with traditional valuation frameworks.”

That could be gold, crypto, commodities, or other asset classes that are attractive during certain parts of the cycle but which “don’t naturally fit themselves into discounted cash flow”.

“A TPA mindset allows you to get these things into portfolios because you don’t need a bucket to put them into,” Chee said.

TPA investors are also “agnostic” about how they get a certain set of economic exposures, choosing the access point that is best suited to the opportunity rather than slavishly adhering to a passive or active mindset.

“Then, in relation to this access point selection, just broadening the manager research process rather than thinking about it as ‘I’m an equity researcher, I’m a fixed income researcher’ – researching not just ideas, but the underlying environment in which I’m operating.

“The best investment opportunities that we’ve found in recent years have been the result of regulatory change, structural arbitrage, things that don’t come up if you just think about researching an individual asset class style.”