[ad_1]
The Chartered Institute of Alternative Investments has partnered with multiple asset owners based outside the United States to champion a new approach to institutional investing that eschews asset class benchmarks in favor of overall portfolio outcomes. Advocates argue that resourcefulness may require a generational change. Embed.
The group this week published a paper on the total portfolio approach co-authored with Australia’s Future Fund, Canada’s Canada Pension Plan Investment Board, New Zealand Superannuation Fund and Singapore’s sovereign wealth fund GIC.
The TPA strategy relies on the CIO, with support from the organization’s board of directors, setting asset allocation using an investment team-focused process. CAIA Chairman John Bowman said it could be difficult for public pension funds to implement their strategies..
TPA measures success based on a fund’s total return, rather than its value relative to a benchmark, and uses factors to achieve diversification rather than asset classes.
The report, “Unleashed Innovation – The Rise of the Total Portfolio Approach,” was presented by CAIA at the AltsLA conference, held March 18-20 in Los Angeles.
This approach has been presented as the “next frontier” for portfolio construction, a successor to Yale, Canadian Universities, and Norwegian Universities. A version of traditional strategic asset allocation, a model centered around fixed-target asset allocation.
Principles of the total portfolio approach
The total portfolio approach is “a unified means of evaluating risk and return across a portfolio,” Jeffrey Rubin, senior managing director and chief investment strategist at CPP Investments, said in a CAIA report. It is stated in the book.
There are no specific guidelines that investors must follow. Rather, New Zealand Pension Fund head of asset allocation Charles Hyde said in the CAIA report, it is “a state of mind rather than a policy or process”.
According to a report from WTW’s Think Ahead Institute, the performance of funds using TPA should be measured based on total return relative to the fund’s objective, rather than a benchmark. An investment’s opportunity for success is defined by its contribution to overall portfolio performance, not by any particular asset class. Diversification is primarily done by risk factors rather than asset classes.
Rubin Walker and Derek Walker, managing directors and heads of portfolio design and construction at CPP Investments, write that TPA does not simply view asset classes through broad labels such as “equities” or “real estate.” There is.
“With this understanding, you can more precisely achieve a favorable combination of factor exposures designed to maximize returns at a targeted level of market risk,” the authors write.
Portfolio strategies are implemented by one team working together, rather than teams from multiple asset classes competing for capital. Doing so allows allocators’ investment teams to be agile and make “meaningful changes to their portfolios in a short period of time,” said Stephen Novakovic, managing director of curriculum and content research at CAIA. Director Christy Hamilton said.
WTW’s report highlighted that asset owners may vary in how much weight they place on the various attributes that make up a TPA.
Governance, culture and capital competition
In its report outlining the Total Portfolio Approach, CAIA notes that it is not as “prescriptive”, meaning it does not adhere to strict rules, as other investment models such as the Fund, Norway and Maple models. pointed out.
CAIA identified four common practices of TPAs that investors who contributed to the report had already demonstrated. These companies have strong heir CIOs who are unencumbered by strict rules or outside pressures. Invest through a factor lens. Select only the best assets. Own a single portfolio culture rather than a cluster of competing groups.
Governance and flexibility: Australia’s Future Fund practices what it calls a ‘whole-of-portfolio bonding approach’. This means the fund has a mandated CIO office and no asset allocation targets, allowing the fund to “discuss global developments and competing opportunities without being constrained by labels or buckets.” ” Ben Samildo, CIO of Future Fund, said at CAIA. report.
factor: CPP’s Mr. Rubin and Mr. Walker favor a “factor lens” approach when classifying asset classes and understanding the drivers and risks and returns of diversified portfolios. “The foundation of a multifactor lens begins with establishing an appropriate market risk appetite and then allocating that risk across the exposures that are believed to yield the best risk-adjusted return results over a market cycle. ” states the report.
Choose the best: “At the heart of the total portfolio approach is the idea that each investment should be part of a portfolio,” writes New Zealand Super’s head of asset allocation, Mr Hyde. “That is, each investment must be sufficiently attractive relative to the set of available alternatives to warrant inclusion in a portfolio.” He described the technique as a “competition for capital.”
Unified culture: Because organizing investment offices as separate fiefdoms often does not yield the best results for the organization as a whole, TPA outlines a collaborative setup. For funds adopting TPA, CIOs will need to “foster a collaborative team and set of norms built on agility and long-termism”, says Singapore’s GIC, with responsibility for portfolio-wide policy and allocation. Swee Cheng Chiam, who serves as a director, wrote:
Implementation challenges
Implementation of the total portfolio approach varies by allocator. What works for university endowments may not work for public pension funds, and vice versa.
“It is abundantly clear that implementing a TPA is a full-scale transformational initiative and not something to be undertaken lightly,” Jayne Bok, WTW’s head of investments in Asia, said in the CAIA report. .
CAIA’s Bowman says implementing a total portfolio approach starts at the board level and won’t happen overnight.
“Boards need to call it the fulcrum of the whole process,” Bowman said. “If the board is not aligned, supportive and fully supportive of the transition towards different levels of empowerment and separation of responsibilities, right down to the CIO and staff, it will be a very quick transformation process. , it’s not going to work very well.” So this is a baby stage process and perhaps he has to start with the CIO joining the board. [about] Part of the benefit of taking a progressive, multi-year approach is to implement and test some of these elements in a small format, gain more support, and ultimately continue down that path. I will explain the parts. ”
Implementing TPAs can be particularly difficult for public pension funds, Bowman said.
“I think public pensions in the United States probably have a greater challenge than most other asset owners, all else being equal,” he says. “If you’re going to disrupt something and change something and take risks, which is what good leaders do, you have to make things inefficient, you have to make them uncomfortable, you have to make them uncomfortable, and you have to It takes some attrition and change and hard work,” all of which ultimately leads to progress. But that’s really hard to ask of a four-year-old public pension CIO with other competing gurus and a motivated board of directors. ”
Related article:
“5 Ways to Strengthen Your Portfolio for Tomorrow’s Worst Case” by CAIA
CAIA Association Appoints Current EVP John L. Bowman as President
CAIA paves the way for democratization of alternative assets
Tags: CAIA, Canada Pension Plan Investment Board, Future Fund, Jeffrey Rubin, GIC, John L. Bowman, New Zealand Pension Fund, Portfolio Construction, Thinking Ahead Institute, Total Portfolio Approach, TPA, WTW
[ad_2]
Source link
