Advisor unpacks how making each asset compete for the same dollar can help advisors add value, while outlining trade-offs and risks
Last month, the California Public Employees’ Retirement System (CalPERS), a pension fund managing almost $500 billion (USD), voted to adopt a total portfolio approach to their asset management. The method, commonly referred to as a TPA, rests on a fundamental question about investing: why should we delineate investments by asset class? Advocates for a TPA argue that the investable universe has become so sophisticated that utility of certain investments are constrained by conventional categorization. They advocate, instead, for letting the whole investable universe compete for each dollar of AUM.
As the approach gains traction and purchase in the institutional investing space, one advisor notes that the idea could be helpful for the retail channel to grasp. Scott Starratt, investment advisor and portfolio manager at Starratt Wealth Management of Canaccord Genuity, explained how a TPA might work in an advisor’s practice and how using an approach like it might help advisors add value in a market dominated by index strategies. He explained the risks and unknowns about this approach, too, emphasizing that in this early stage curiosity can benefit advisors.
“In the past, we'd have bonds, we'd have, stocks, private equity, private debt, all these different asset classes, and you could be as general or specific on the asset class,” Starratt says. “But the idea now is to ask why we should be dividing, for example, private equity and public equity? Why shouldn't they be competing for the same dollar in a portfolio as anything else in a portfolio?”
While that kind of approach might immediately think the whole portfolio will simply seek the highest return possible, Starratt notes that the TPA doesn’t just dictate return maximization. In line with the pension funds that currently use it, the TPA is meant to balance the need for return, tolerance of risk, and meeting of liability. It would allow, he argues, for a deeper form of diversification.
While the current bucketing of asset classes may be one way to diversify, Starratt notes periods in recent history where exposure to a macro theme like interest rate risk cut across those traditional asset classes. Rather than looking at an asset class based on whether it fits in a bond sleeve, for example, he notes that using a TPA can allow an advisor to ask exactly what this asset can do in the client’s portfolio. Utility, not definition, becomes paramount.
While saying that out loud may feel revolutionary for the industry, Starratt notes that there has already been a shift towards discussions of product by utility and not category. This has largely happened in the bond sleeve of portfolios where the long period of zero interest rate policy, followed by unexpected bond volatility, has resulted in a slew of products and strategies marketed as bond replacements. The industry is already thinking in these terms, he argues, without even knowing it.
“All a TPA does is it kind of evolves our understanding of where the industry is going,” Starratt says. “This is still at the pension level. But in some ways, I think retail is almost ahead of it.”
While the idea of assessing the whole investable universe to build client portfolios may seem daunting, Starratt argues that advisors already have the frameworks in place through the KYP and KYC processes. They can assess their client and determine what their client needs from a portfolio, then assess products that suit that need, regardless of categorization. The approach, he notes, can actually help with the psychological management inherent in an advisor’s job, allowing clients to more clearly see what each asset is meant to do for them, and how it’s performing against that stated goal.
While this approach may be freeing, if somewhat labour intensive, Starratt notes that it also comes with some risks and trade-offs. He argues that if the approach manifests more as lip service than as a real mindset shift for the industry, it may simply become another meaningless buzzword. He notes, too, that when managed at a higher level this approach places more power in the hands of CIOs, as the ability to benchmark their performance may be less clear. Nevertheless, he argues that the mindset shift that comes from a TPA could be a helpful way for advisors to add value.
“This is a new way of doing things, but we’ve seen a lot of new ways of doing things that weren’t necessarily successful,” Starratt says. “I would caution any pitch with a view of the TPA as a useful theory that some of the largest pension funds are trying out. This is not steak and potatoes for most people at this point, but it does ask us to look at things differently and could help evolve the way retail advisors work.”
Scott Starratt is a Portfolio Manager at Canaccord Genuity Wealth Management. His views, including any recommendations, expressed in this article are his own only, and are not necessarily those of Canaccord Genuity Corp (Member: CIPF/CIRO). Investing in any of the asset-class(es) mentioned here may not be suitable for all investors, as there are different types of risks involved with this investment strategy. Even if suitable to your level of risk tolerance, they may not be appropriate for your portfolio, depending on what other investments you hold. Commissions, trailing commissions, management fees, and expenses all may be associated with fund investments. Fund investing is not guaranteed, values change frequently, and past performance may not be repeated. Diversification and asset allocation do not ensure a profit or guarantee against loss.
