Funds rethink asset allocation, favouring dynamic strategies to navigate global market uncertainty
A growing number of the world’s largest pension and sovereign wealth funds are abandoning traditional asset allocation in favour of a more dynamic, holistic investment strategy—one that could reshape how trillions of dollars are managed.
According to Bloomberg, the Total Portfolio Approach (TPA) is rapidly gaining traction among institutional investors, including Canada’s CPP Investments, Singapore’s GIC, and Australia’s Future Fund.
This method pits all investments—public equities, private credit, and more—against each other, seeking the best overall outcome for the portfolio, rather than confining decisions within asset-class silos.
CalPERS, the largest public pension fund in the United States, is poised to vote on adopting TPA, a move that would see it shift from 11 asset class benchmarks to a single reference portfolio and an active risk budget.
For pension leaders, the appeal of TPA lies in its flexibility and responsiveness to real-world market shocks, such as inflation spikes or geopolitical events, which can upend static models.
Michael Wissell, chief investment officer at the Healthcare of Ontario Pension Plan, explained that the old Strategic Asset Allocation (SAA) model assumes markets are in equilibrium—an assumption he says is rarely true.
“When you use a model that’s predicated on something that just simply isn’t true, you can get yourself into trouble,” Wissell told Bloomberg.
Manroop Jhooty, head of Total Fund Management at CPP Investments, highlighted that TPA allows for more nuanced trade-offs.
For instance, if a private equity allocation exceeds its target, a TPA framework enables the fund to reduce listed equities instead of selling private holdings at unfavourable prices, since both are viewed as equities driven by similar forces.
“You’re able to make that trade-off decision that in a classic SAA framework is just a little bit harder to do,” Jhooty said.
Reported by Bloomberg, a 2024 study by Willis Towers Watson and the Future Fund found that TPA funds outperformed their SAA peers by 1.8 percentage points annually over a decade, though results varied across funds and risk appetites.
However, the shift is not without challenges.
As per Bloomberg, critics argue that TPA can blur accountability and governance, as investment teams are granted greater discretion and traditional benchmarks are replaced by broader fund goals.
Some, like Max Townshend of Local Pensions Partnership Investments, contend that a well-implemented SAA can be just as flexible if governance is robust.
Meanwhile, Norway’s sovereign wealth fund—the world’s largest—has drawn attention for its cautious approach to risk.
As reported by Reuters, Norwegian Finance Minister Jens Stoltenberg stated that while Norway supports European Union efforts to use frozen Russian assets for Ukraine, it will not use its sovereign wealth fund as a sole financial backstop, citing the fund’s strict spending rules and its critical role in national finances.
