The biggest risk in adopting a total portfolio approach (TPA) is complexity without accountability and not the choice of investment framework itself.
In our latest edition of The Frontier Line, we examine how institutional investors can make competing objectives, hidden exposures and investment trade-offs explicit, while ensuring governance keeps pace with increasingly complex portfolios.
The paper, the first in a three-part series, examines TPA’s origins, its appeal to asset owners and the implications for Australian investors. It argues a hybrid model that retains a Board-approved strategic anchor while strengthening whole-of-portfolio decision-making may be the most appropriate outcome for many institutions.
Frontier Advisors Director of Specialist Services and author of the TPA research paper series, Paul Newfield, said the debate needed to move beyond investment terminology.
“The danger is not SAA versus TPA. It is complexity without accountability,” Paul said.
“Asset-class allocations tell a Board where capital sits, but they do not always reveal the economic risks building up across the portfolio, how those risks interact or where liquidity will come from under stress.
“TPA is useful when it improves those conversations and the decisions that follow. It is not a new asset allocation formula or an automatic source of better returns.”
Interest is strong, but clarity is missing
TPA is widely written about and discussed but not always well, or clearly understood. Our paper refers to audience polling from this year’s client conference to illustrate the uncertainty around TPA. In one poll, 43% of respondents associated TPA with a pure competition-for-capital model, 27% saw risk as its key anchor and 30% were unsure what the term meant.
In a separate question about the biggest risk of moving to TPA, 25% selected a mismatch with existing governance, policy or delegations, while 24% selected blurred accountability, attribution and decision rights.
“Before asking whether to adopt TPA, investors should ask what problem they are trying to solve,” Paul said. “Where are trade-offs hidden? Where are decisions too slow or too siloed? If the existing model already handles those issues well, a wholesale redesign may not be necessary.”
Not every objective can win at once
The paper identifies “objective overload” as a major governance challenge. Asset owners must balance returns, downside resilience, liquidity, fees, regulatory benchmarks, peer comparisons and sustainability commitments – objectives that cannot all be maximised simultaneously.
“Good governance is not a promise that every measure will be green at every meeting,” according to Paul. “It is agreement about what matters most, which constraints cannot be breached and which compromises are acceptable. TPA does not remove those difficult choices. However, it should make them more transparent.”
Complexity must earn its place
A central theme is the role of a reference portfolio: a simple, low-cost expression of the Board’s risk appetite against which a more complex actual portfolio can be assessed. The paper argues that private assets, active strategies and overlays should demonstrate their value after allowing for costs, illiquidity, risk and governance demands.
For Australian investors, the paper argues that regulatory requirements, disclosure, peer comparisons and stakeholder communication can make retaining an SAA anchor sensible, while using total-portfolio thinking to improve risk budgeting, liquidity management and investment choices.
“A hybrid is not necessarily a compromise on quality. It can be the right design for the institution,” Paul said. “The destination should fit the problem. The standard should always be better decisions, with clear accountability for the total portfolio.”
The next instalments in Frontier’s series will examine measurement, decision tools and the operating-model changes needed to put total-portfolio thinking into practice.
