The allocation evolution: The emergence of total portfolio approach investing
How institutions can take a more holistic approach within traditional asset allocation frameworks
Financial markets look radically different today than at the turn of the 21st century. Private markets have seen tremendous growth, and more frequent macroeconomic regime shifts have undermined assumptions about long-term risk premia and stable asset-class correlations. That has led some institutional investors to explore new approaches to portfolio construction, such as the total portfolio approach (TPA).
TPA considers portfolio construction holistically, focusing on total risk, return and liquidity across the portfolio. That contrasts with traditional strategic asset allocation (SAA), which builds portfolios around predefined asset class weights. A full transition to TPA can require significant changes to governance and processes, so many investors are instead incorporating some elements of TPA within their existing SAA framework, such as improved liquidity modeling and explicit risk budgeting.
We see three main practical considerations for institutions that are evaluating incorporating TPA:
- Choosing a risk-management framework based on the institution’s objectives and liabilities rather than asset-class volatilities or tracking error
- Managing liquidity as allocations to illiquid assets grow, ensuring they are of the appropriate size and composition
- Ensuring optimal manager selection, looking for strategic partners that can contribute to total portfolio outcomes and offer customized exposures and strategies
Ultimately, SAA and TPA are not mutually exclusive frameworks but endpoints on a spectrum. The most appropriate approach will depend on each institution’s objectives, liquidity profiles and governance structure.
Disclosures
This commentary and the information contained herein are for educational and informational purposes only and do not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This commentary discusses broad market, industry or sector trends, or other general economic or market conditions. It is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Asset Management Ltd. and its affiliates (together, "Brookfield").
This commentary contains information and views as of the date indicated and such information and views are subject to change without notice. Certain of the information provided herein has been prepared based on Brookfield's internal research and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may have not verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein including information that has been provided by third parties and you cannot rely on Brookfield as having verified such information. The information provided herein reflects Brookfield's perspectives and beliefs.
Investors should consult with their advisors prior to making an investment in any fund or program, including a Brookfield-sponsored fund or program.
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