Under TPA, an investor's job is no longer to fill asset class buckets. Instead, it's to generate knowledge on how any potential investment—be it a manager, ETF, or direct deal—adds value to the overall portfolio's objectives, forcing an apples-to-apples comparison of all opportunities.

A key enabler for CalPERS' shift to a Total Portfolio Approach (TPA) was a pre-existing change in compensation. By rewarding all investment staff based on the entire fund's performance, not their specific asset class, the organization had already fostered the necessary collaborative mindset for TPA to work effectively.

A key advantage of TPA over a Strategic Asset Allocation (SAA) model is its ability to evaluate hybrid or novel investments that don't fit into predefined buckets. By focusing on an investment's contribution to total portfolio risk and return, TPA can approve valuable opportunities that would otherwise be rejected for not fitting a silo.

In a TPA model, diversification is a total-portfolio responsibility. This frees individual teams from needing to diversify within their silo. They can build more concentrated, high-conviction portfolios, as their contribution is assessed at the whole-fund level, where diversification is achieved across different strategies.

Unlike traditional asset allocation where portfolio decisions are jointly owned, TPA clarifies governance. The board sets a risk appetite via a reference portfolio, but management is solely accountable for constructing and managing the actual investment portfolio, making their performance directly and transparently measurable.

Stephen Gilmore's first step in moving CalPERS to TPA was demonstrating to the board that a simple stock/bond portfolio closely tracked the fund's actual performance. This revealed the fund's primary risk drivers were simple betas, making the case for a reference portfolio and a more holistic management approach more intuitive.

Contrary to common belief, the Total Portfolio Approach (TPA) isn't about nimble trading. It's a framework that uses data to understand the risk of any investment relative to a simple reference portfolio (e.g., 70/30). This allows allocators to fund compelling opportunities flexibly, freed from rigid, pre-defined asset class silos.

A common inefficiency at large funds is under-scaling proven internal talent. Stephen Gilmore found that CalPERS' own equity and fixed income teams produced high information ratios but were hamstrung by active risk constraints, preventing the fund from fully capitalizing on its most successful, in-house alpha-generating strategies.

A pure TPA system can alienate specialists hired for specific asset classes. A hybrid model, where a portion of capital is allocated to traditional buckets, allows organizations to retain deep expertise in areas like private equity while still gaining the benefits of a holistic TPA overlay on the rest.