The funds that take a total portfolio approach added 1.8 per cent per annum over 10 years above those that use strategic asset allocation in a recent Thinking Ahead Institute study of 26 asset owners, including the Future Fund. And the systems-thinking TPA approach, with the benefits of dynamism and joined-upness, will help asset owners in an environment of increasing complexity according to the report’s author, Roger Urwin.
Urwin said the institute has research to back up those claims with the results of the TAI’s recent Global Asset Owner Peer Study in conjunction with the Future Fund the latest data in support. The study examined 26 asset owners and found the 36 per cent with a total portfolio approach (TPA) produced superior returns that make Urwin’s estimate of value add look conservative.
“It’s a crude test, but the TPA organisations outperformed the SAA organisations over the last 10 years by 1.8 per cent. And 1.8 per cent per annum is just a very, very substantial margin in our industry,” he said. “Quite honestly I’ve never seen a margin out of one factor as big as that before.”
Urwin emphasised that in part the two portfolio allocation approaches solve different problems.
“SAA basically solved a governance problem, and it did it well. But it didn’t solve the investment problem,” Urwin said. “TPA is a really important design feature by which organisations can probably get better performance.”
The most recent asset owner peer study found that the number of funds doing SAA was half what it was when the same study was conducted seven years ago, and the trend to TPA was continuing, with 20 of the 26 funds stating they were either at their maximum TPA or moving more towards TPA.
The benefits of the TPA approach include a more dynamic portfolio and more “joined-upness” which were both useful in a more complex environment, Urwin said.
Managing complexity was the number one concern of the 26 funds, cited by 73 per cent of the CEOs and CIOs who participated in one-on-one interviews.
“When we did this study in 2017 it wasn’t on the list, it wasn’t anywhere,” Urwin said. “But over that time complexity has become one of the most difficult things for organisations to cope with.”
One of the key takeaways from this result, according to Urwin, is that individuals are spending most of their time on business as usual and not enough time thinking about whether their organisations are adapting to the changing world.
The study also showed that 88 per cent of the fund’s investment teams expect systemic risks will grow in number and size. These include geopolitical confrontation and climate change.
Building more resilience including more agile organisational design, better culture and stronger risk frameworks – combined with the systems-thinking TPA approach – will help position asset owners in this environment, he said.
