Taking a total portfolio approach (TPA) can add 50 to 150 basis points of return annually over a strategic asset allocation (SAA) approach, according to new research from the Thinking Ahead Institute in partnership with the Future Fund.

In your latest Global peer survey of asset ownersthe institute noted that over a 10-year horizon, TPA funds produced 1.8 percent per year higher performance than those that adopted SAA. This is based on performance data obtained from the funds’ public disclosures and the Global SWF data platform.

Examining 26 funds representing more than US$6 trillion of capital, the study noted that TPA take-up was around 35 percent, compared to 38 percent for SAA and 27 percent for a hybrid model.

However, the adoption of TPA among investors looks set to grow, with SAA generally "losing the argument" as understanding of the differences between the two approaches grows.

Of the 26 funds surveyed, about 10 funds expect to remain static, while 16 expect to move in the TPA direction over the next five years.

"TPA excels at framing and executing decisions by focusing more on targets rather than benchmarks and whole funds rather than asset classes," Roger Irwin, co-founder of the institute, told InvestorDaily.

TPA takes a more holistic approach to portfolio construction, focusing on diversification through portfolio factor exposures versus asset class exposures, as opposed to traditional SAA, which is structured around more allocations based on asset class and benchmark comparisons.

As funds are increasingly concerned about managing complexity – some 73 per cent said it remains a top concern among external factors – being “united” through approaches such as TPA “benefits from the diverse thinking of people, teams, partners and ideas,” he said.

“Joining works well in TPA situations but is difficult to achieve in SAA agreements. The peer survey revealed a strong view that complex environments are very difficult for individuals to handle alone and are best handled in teams,” Urwin said.

Other systemic risks most important to funds, according to the survey, include geopolitical confrontation (84 percent), escalating climate change (72 percent) and inequality and social challenges (48 percent), with almost 90 percent of the largest investment funds teams around the world anticipating systemic risks will grow in frequency and size.

With that, Irwin highlighted the “tough road ahead” for asset owners, explaining: “All investors need to prepare for a bumpier ride by building more resilience into their organization – forward thinking, more flexible organizational design, better culture and stronger risk frameworks will all play their part.

"Faced with such global challenges, the structures and teams of the investment world need to be rethought."

He added: "Organisational design and the way organizations are run will be one of the main drivers of 'alpha' investing in this part of the 21st century."

Getting on the front foot

Against the backdrop of the evolving market landscape in recent years, Peer Study participants using TPA spoke of the "adaptability and dynamic response" of the approach maintained during recent macro shifts from lower to higher interest rates and inflation. said Urwin.

Meanwhile, he said SAA users had moved "slower and less decisively".

The TPA, which has come to prominence in recent decades, includes local supporters such as the Future Fund, which adopted the TPA about 15 years ago, and the NSW Treasury Corporation (TCorp), among others.

However, Irwin cautioned, the move to TPA "is not a plug-and-play change."

"Funds moving from SAA to TPA must establish a new investment process, adapt to new management arrangements and align behaviors and priorities with a new culture," he said, adding that management and cultural adjustments are often more challenging than the technical aspects of transition.

“The transition to TPA involves multiple stakeholders embarking on a journey of change – both Future Fund and TCorp have planned and executed their journey over a period of time. This is not a plug and play change.

“While these funds arriving within the TPA are confident in the investment merits, they are troubled by the complex nature of aligning the organization with a team philosophy. It's hard work.”

Earlier this year, Alicia Gregory, former Deputy Chief Investment Officer at Future Fund, explained how TPA helped the Australian sovereign wealth fund identify major paradigm shifts in the markets, including building portfolios for a high interest rate environment as early as 2019 ., which ultimately helped add $2 billion in value to the portfolio.

Speaking at the Australian Wealth Management Summit in May, she described an additional benefit of the TPA as ensuring the fund was not "over-diversified" compared to peers taking a SAA approach.

“Sometimes it can feel like it takes a lot of talking to get something done, but [the approach] it's really all about having great resources and the best current opportunities based on where we think the global risks are and looking ahead and forming a view of the best portfolio you can have today given the valuation of the markets,” Gregory said.