Introduction
Total Portfolio Approach, or TPA, has been gaining attention in the institutional investment community, especially after CalPERS voted to adopt TPA for its $590 billion portfolio. That move was widely described as a shift in how large institutions govern investments, placing more emphasis on flexibility, risk alignment, and a portfolio-level view of decision-making. But for many institutional investors, especially those already working with thoughtful OCIOs, the ideas behind TPA probably don’t feel new. Is this really the revolution? Will it be televised? Leita has spent hours digging into investment philosophy and portfolio construction with OCIOs across the country, and many of these ideas in TPA resonate with how great OCIOs generate investment ideas today.
This post offers a straightforward roadmap to what TPA is, and what it isn’t trying to be. In Leita’s opinion, it doesn’t replace strategic or tactical asset allocation. In fact, it may be two different ways of getting to a similar end-result portfolio. Whether you follow a standard institutional process or a TPA approach, at the end of the day, you’re still going to own a lot of growth assets (mostly equities) and some diversifiers that do well when equities don’t (probably bonds, maybe some trading strategies). But what is different about TPA is it gives a thoughtful framing of how institutional investors tackle some of the problems inherent in mean variance optimization, and a way of rethinking governance to give more decision-making authority to investment experts.
Why TPA Emerged
If you only read one (other) piece on TPA, read CAIA’s initial report, The Rise of Total Portfolio Approach. This section explains why TPA emerged very eloquently, for those of us who are intimately familiar with the way institutional portfolios are built today:
As CAIA notes, the traditional asset class-based process can create blind spots. This is especially true when risk management systems and ongoing portfolio monitoring miss the same blind spots. TPA tries to address this by reframing the allocation process. Although portfolios ultimately end up owning the same things (equities – a lot of them; bonds – some of them; and so on), the thought process of choosing which assets to allocate to has a new frame. This may not sound revolutionary, but humankind is very susceptible to framing.
What’s Really Different about TPA?
TPA still requires a strategic, long-term orientation and all the discipline and patience we need to invest in today’s markets. Most institutions pursuing CPI + 5% still need to own growth-oriented assets that can achieve that return over time. The math isn’t different in TPA. But the way capital is allocated, monitored, and reallocated can shift. Here are a few key ways that a TPA process looks different than today’s industry standard:
Governance
Especially the interaction between the Investment Committee and the investment team.
TPA asks institutions to place more trust and confidence in their investment team, whether that’s an in-house investment team or an Outsourced Chief Investment Officer. The Investment Committee defines fewer parameters up front, allowing the investment team to make real-time decisions on attractive investment opportunities.
Is it really that different? Yes, if you’re using an investment consultant who brings you recommendations to fill your asset class buckets one by one. Or if your Investment Policy Statement has 20 asset classes, each with their own targets and tolerance bands (especially if those bands are tight). But Leita sees plenty of organizations who have already shifted closer to this model, evaluating opportunities based on the role in the portfolio (growth, diversifying, inflation protecting) and building an IPS that allows the OCIO to implement this way. Even in those instances though, benchmarking, reporting, and monitoring (all key parts of governance) do look different. More on that below.
Choosing What to Buy
Asset classes are hard to imagine away. Some of them are silly (a hedge fund is defined by its legal structure, not the assets it owns) and some aren’t (US large cap equity). But well-defined asset classes ultimately describe what kind of security you own. Do you own equity or debt? Is that publicly traded or privately traded? Do you own a physical asset? What kind of asset? In the absence of categorizing investments to a greater or lesser extent by asset class, investors need a new framework.
TPA often uses factor analysis to better understand what’s actually driving portfolio risk and return, as a replacement for asset classes. Instead of sorting investments as “stocks” or “bonds,” it asks: is this security’s return stream impacted by inflation, growth, credit, momentum, or something else? The goal is to avoid blind spots and ensure the whole portfolio isn’t leaning too hard in one direction without realizing it.
Is it really that different? For some investors. Factor investing was in vogue several years ago, with tons of smart beta products being pushed to institutions and retail investors alike. And factor investing would likely have helped fundamental value investors avoid years of painful underperformance waiting for that cycle to reverse. Leita still sees OCIOs that use factors as a component of the decision, but we’d be hard pressed to think of an OCIO that relies on factors as heavily as TPA seems to.
Competing for Capital
TPA loves to talk about competing for capital. Every investment in the portfolio has to earn its place. That means new ideas are evaluated alongside existing ones based on how they improve expected return, risk, or liquidity. In theory, nothing is automatically protected by an asset class target. Everything competes for capital based on what it contributes now, not just what it was supposed to do when the policy was set. It helps to overcome incumbency bias in portfolios too.
Is it really that different? Maybe. Leita works with OCIOs who take this approach, re-underwriting portfolios on a regular basis and asking each manager to re-earn their place. It’s not common, but it happens. That said, a big unanswered question Leita has is how illiquid and liquid assets can truly compete for capital. Its one of our follow-up questions about TPA.
Benchmarking
Benchmarking does look different under TPA. CalPERS has moved away from eleven asset class benchmarks to a single reference portfolio composed of 75% equity/25% bonds, with a 400-basis-point active risk limit.
Is it really that different? Yes. Leita is hard-pressed to think of a single OCIO that encourages clients to adopt a simple reference portfolio with an active risk limit as a benchmark. Here, TPA does seem to change things materially. The phrase “risk budget” is used quite often in the CAIA overview of TPA, and hardly at all with most of our institutional clients. Leita is more likely to hear risk budgets described in on-site due diligence meetings with OCIOs talking about their own portfolio construction methodologies. In other words, this approach is used by sophisticated investors, but it’s not necessarily visible to Investment Committees. As a pertinent example, this presentation from CalPERS a few years back looks at the program’s use of risk budgeting, which the staff had been implementing for some time before it became part of the oversight governance framework. Typically, though, you use the same inputs from a mean-variance optimization process in constructing a risk budget; this is an evolution, not a revolution. Active risk is just a fancy way to describe tracking error, or in plain English, how different the returns look from the reference portfolio. Meketa has a great primer on risk budgets if you want to study up. How you set the tracking error limit and enforce it – now that we look forward to digging into.
Risk Monitoring and Reporting
Since TPA uses a different selection mechanism for securities (factors instead of asset classes), it stands to reason that reporting will look different too. Institutional reports tend to heavily emphasize asset allocation, results by asset class, and performance of managers within each asset class. Risk is managed largely by allocating between asset classes and underlying managers. In a TPA framework, risk is managed at the portfolio level. This is what Leita is most excited about in the TPA framework. Investment Committees have a fiduciary duty to oversee the portfolio, and well-designed reports that show meaningful, actionable information at a total portfolio level are welcome under any framework.
Is it really that different? Again, maybe. Now, this shouldn’t necessarily be a problem in 2025, the year of having AI co-draft a blog like this to publish in a fraction of the time it would have taken in 2024. Surely data processing and risk management can’t be an issue in this modern, data-driven world. This is true for strategic asset allocators and for TPA, by the way.
Well, it still is an issue. In on-sites with OCIOs, Leita loves to explore the technology teams are using to make and monitor investment decisions across portfolios. Does it surprise you to hear that many risk systems can only actively monitor liquid asset classes? Does it surprise you that major OCIOs still aren’t reliably calculating and using attribution analysis to explain the drivers of long-term portfolio returns? That factor analysis is hit or miss? And this is for organizations who use a strategic asset allocation framework. Now think about TPA, which needs good, actionable, portfolio-level insights across public and private asset classes. It doesn’t seem like technology is widely deployed that can actually deliver on this promise.
Open Questions
Leita’s research on TPA is a work in progress. Here are some of the questions we are actively researching. Thoughts to share? Reach out!
- How can liquid and illiquid assets truly compete for capital in a portfolio?
- If 30% of a portfolio is already tied up in yesterday’s illiquid assets, how can those assets truly be competed with by today’s best ideas?
- Does capital competition cause higher turnover portfolios?
- Selling low and buying high is never a good idea. Is that what TPA encourages in the hands of unskilled investment teams? It seems like it could lend itself well to chasing the hot dot.
- Can Investment Committees even implement TPA with a non-discretionary investment consultant and no internal staff?
- How does a governing board determine the active risk limit in TPA?
- Technology is an issue, but TPA needs it more, not less. Where are the TPA teams getting these systems? Build? Buy? Inquiring minds want to know.
Conclusion
The Total Portfolio Approach is a thoughtful reframing of how institutions might better align investment decisions with portfolio-level goals. It shifts the decision-making lens of investment teams and OCIOs from policy compliance to total contribution. That can unlock smarter risk management, better use of internal expertise, and more dynamic oversight.
But for many institutional investors, especially those already working with flexible, engaged OCIOs, this may feel more like a refinement than a revolution. In the end, it’s still about earning long-term returns within a defined risk and liquidity framework.
As CalPERS and others begin implementing TPA, we’ll be watching closely and listening to OCIOs and institutions around the country. Want to share your thoughts on TPA? Please reach out – we’d love to hear from you.
