Analysis of New Zealand Super's performance revealed a mediocre "batting average" (hit rate of successful investments) but an amazing "slugging average." They succeeded by allocating disproportionately large amounts of risk to their highest-conviction ideas. The magnitude of wins, not their frequency, drives long-term outperformance.
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.
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.
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.
Australia's Future Fund started with a $60B lump sum, forcing a conservative initial strategy to avoid a catastrophic early loss. This contrasts with funds that grow via small contributions and can afford a higher risk appetite from the outset. Initial funding conditions significantly shape long-term strategy.
Moving from Strategic Asset Allocation (SAA) isn't about taking on more risk. CalPERS calculated that their existing SAA policy ranges already allowed for a ~450bps active risk budget. TPA maintained this budget but granted flexibility to deploy it across the entire portfolio, unconstrained by rigid asset class silos.
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.
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.
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.