The total portfolio approach (TPA) has experienced a surge in popularity among local asset owners in the last few years, with a number of super funds reorganising their investment models and teams to capture the performance upside promised by a number of TPA proponents.

But one of the challenges of pivoting to TPA is creating accountability, according to David Bell, executive director of The Conexus Institute*, who says that TPA creates “free rider” problems where it’s possible for underperformers to ride the coattails of stronger-performing team members.

“Imagine if you’ve got some stars who are really driving the key decisions in the fund, and then you’ve got an all-in model where everybody participates in the performance of the fund,” Bell tells Investment Magazine. “It can make individual accountability harder to identify, along with individual skills and value add. You can have people who aren’t adding much value getting a good outcome.”

In the more established strategic asset allocation model, where investment decisions often take place in individual team siloes, the accountability is “simpler and more clear”, Bell says.

“Whether that perfectly aligns with member outcomes is the squeeze point,” Bell says. “But all the way along that chain there’s far more transparency and you can create accountability from that. I’ve always been drawn to the TPA model, but for that to be a sustainable model into the future means putting good accountability constructs around it.

“Otherwise, there’s always risk that the board becomes strained in their convictions because they’re not seeing the results come through.”

That problem can be compounded by the use of simple reference portfolios to measure performance, which, Bell says could also be “evolved and improved” to focus more on risk rather than returns.

“The more you can do to tell the story with outcomes the better,” Bell says. “But as soon as you tell stories, you’re introducing subjectivity to a process that’s meant to be creating accountability.

“What you’re doing is not chasing the one scenario, or predicting one scenario. If you look across a range of scenarios and construct a robust portfolio to perform acceptably well across all scenarios, then you nearly guarantee that you’re not going to be the best performing fund. And so it’s about prosecuting a case and being able to explain how you came up with that.”

Building that accountability into TPA models is growing more and more important as markets continue to behave in ways that are unlikely to be conducive to short-term performance of funds that use it, Bell says.

“Markets have been reasonably narrow, while TPA is always a little bit more incentivised to be diversified and has greater use of private assets… This would be a really difficult time for TPA strategies; anything that promotes a more diversified portfolio would be struggling at the moment, and anything that uses private assets would be struggling at the moment.” 

*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Retirement Magazine.

The upcoming Investment Magazine Fiduciary Investors Symposium will see investment leaders take sides in a formal Oxford Union-style debate on the motion “that funds need to embrace a total portfolio approach to deliver good investment outcomes in this new market environment”. Eligible asset owner delegates can register here.