A couple of weeks ago we wrote about the endowment model: an investment strategy pioneered by Yale’s endowment, built on the premise that alternatives can generate superior returns to the traditional 60/40 portfolio.
This model sits under the broader umbrella of strategic asset allocation (SAA). In short, SAA is a framework allocators use to deploy and manage capital according to pre-determined, long-term targets set by their boards. Under this structure, each asset class team works somewhat in isolation to respectively meet allocation mandates, monitor performance, and report back against static benchmarks.
Recently, a new investment philosophy has started to gain traction: the total portfolio approach (TPA). Under TPA, the board defines total portfolio risk boundaries, liquidity limits, and desired exposure to different risk and return drivers. Performance is then benchmarked against a reference portfolio, say an 80/20 equity–bond mix, with explicit constraints on active risk (how much the portfolio can deviate from that reference mix due to active decisions).
Rather than managing discrete asset class silos, TPA invites teams to consider every investment in the context of its contribution to the entire portfolio.
Transitioning from SAA to TPA isn’t simple. Closed-ended fund commitments can lock up capital for years before distributions start flowing. And implementing TPA requires sophisticated systems for liquidity modeling, factor analysis, and risk scenario testing.
For a live case study, follow CalPERS’ ongoing transition. The effort is being led by their CIO, Stephen Gilmore, who stepped into the role in mid-2024 after leading the New Zealand Superannuation Fund, one of the earliest and most successful adopters of the total portfolio approach.
*Note: TPA isn’t actually “new.” It’s been practiced by a handful of funds for over a decade, but it’s only recently started to gain mainstream attention among large institutional investors.