In this video I discuss an increasingly important framework for institutional investing: the Total Portfolio Approach, or TPA which is the subject of our latest paper.
At its core, TPA reflects a shift in how portfolios are constructed and governed. Rather than organizing capital strictly by asset class, it encourages investors to view the portfolio in a holistic fashion, with all sources of risk and return considered collectively.
The approach has been around for over a decade, and we have long been in favour. However, we have been struck by the jump in the number of questions we have had on this in meeting with investors in recent months.
We think that interest will continue to grow for two reasons. First, lower expected returns and more limited diversification force investors to allocate risk in the most efficient way. Second, the structural growth in private assets means that portfolios need to integrate public and private assets in one framework. Public markets have lost their privileged position and it won’t return.
The defining characteristic of the Total Portfolio Approach is that it rejects the primacy of the asset class in the taxonomy of a portfolio. Instead, it forces us to consider underlying sources of return and risk exposures, regardless of whether they originate in public or private markets, or in passive or active strategies.
Under a TPA framework, the role of the allocator really becomes akin to a curator of return streams, with less regard on where those returns happen to sit in traditional hierarchies.
There are several important implications of this approach.
First, TPA broadens the universe of potential diversifiers. By focusing on return streams rather than asset classes, investors can incorporate alternative sources of return—such as factor exposures, active strategies, or private market premia—in a more deliberate way.
Second, by measuring risk at the total portfolio level, TPA provides a clearer understanding of how different exposures interact, particularly during periods of market stress. This can help reduce unintended concentrations and improve overall resilience.
Third, and perhaps most importantly, we suggest that TPA places greater emphasis on real-world objectives. Rather than anchoring decisions to asset-class benchmarks, it encourages investors to align portfolio construction with long-term goals, liabilities, and spending requirements, in many cases this will be linked to the preservation of purchasing power.
That said, there are meaningful hurdles and costs associated with adoption. It often requires non-trivial changes to governance, decision-making, and organizational structure. Many investment organizations remain grouped around asset-class silos, with distinct teams, processes, and incentive structures that sit oddly with the ethos of TPA. Thus, the transition can be complex and gradual. Moreover, such a shift inevitably bears career risk. If market returns remain very buoyant and diversification ends up not being a problem, then it can be harder to justify.
As a result, most institutions do not adopt TPA in a single step. Instead, they move along a continuum, incorporating elements of the approach over time—such as enhanced risk aggregation, greater use of factors, or more flexible capital allocation across public and private markets.
In our note we set out an example of how an approach to TPA differs from traditional strategic asset allocation. There is a larger exposure to factors and more space for niche assets. Moreover, we suggest that active risk is less important a concept under TPA, so there is a larger exposure to active return streams, driven by our view of a low return from asset classes.
In summary, the Total Portfolio Approach represents a response to today’s investment challenges. By shifting the focus from asset classes to return streams and total portfolio outcomes, it offers a framework that is better suited to an environment of lower returns and less diversified and where the locus of capital raising gas shifted from public to private assets.
While implementation requires careful consideration and strong governance, TPA provides investors with a more coherent way to align portfolios with long-term objectives. We expect more institutions to move in this direction.
Thank you for watching.
