What You Need to Know
Adoption of the Total Portfolio Approach (TPA) is set to grow. In part, this increasing popularity is in response to a particular set of macro circumstances of a new investment regime that implies lower returns and less diversification. But this growth is also for reasons exogenous to the wants of investors, resulting from a shift in the locus of capital raising, with a structurally greater role for private markets.
At its heart, TPA is a holistic approach to allocation that rejects the primacy of the asset class or public versus private split as the basis for allocation. Instead, it recasts the task of an allocator to being the curator of return streams.
There are, however, significant hurdles to adoption: a change in governance structure, change in organization and career risk for those making the transition.
We discuss what this state means for investment praxis. The theoretically pure approach might be hard to adopt, hence other approaches involve starting from constraints (especially liquidity), then making assumptions about what an attractive mix of return streams might be. We show an example of these approaches, which uses simulations to find an attractive resulting allocation.
TPA likely allows for the greater adoption of illiquid assets, factors and active return streams.
