Key Takeaways
- • Eric Friedman of Aon Investments argues in a Pensions & Investments commentary that the total portfolio approach (TPA) debate is distracted by its label, which is often tied to one high-profile implementation, CalPERS.
- • The commentary reframes TPA as four governance questions about risk: metrics, controls, implementation discretion, and agency (compensation).
- • Friedman contends institutions should evaluate each choice individually rather than adopt or reject TPA as a binary decision, and that incremental change may be more prudent than a "big bang" overhaul.
- • The piece is an opinion submission by an Aon author, edited under P&I guidelines but not produced by P&I's editorial team.
Summary
In a commentary published by Pensions & Investments, Eric Friedman, head of thought leadership for the U.S. at Aon Investments, argues that the debate over total portfolio approach (TPA) has become unproductive because it treats TPA as a single, well-defined model. According to Friedman, TPA exists along a spectrum, and many institutions that use the term adopt approaches that differ substantially from the version most commonly associated with CalPERS. He contends that framing the question as a binary choice, whether to adopt TPA or not, obscures the more relevant issue of which governance and implementation choices would improve outcomes for a specific institution.
Friedman proposes unpacking TPA into four risk-related questions that are relevant to nearly all institutional investors regardless of whether they use the label. The first concerns metrics: TPA generally emphasizes whole-portfolio risk measures over asset-class-specific constraints, though he notes most institutions will combine total fund and asset-class measures, since siloed focus can create blind spots while excessive whole-portfolio focus can complicate performance attribution. The second concerns controls: flexibility to rotate across asset classes is often associated with TPA, but Friedman argues the key issue is how much flexibility is appropriate and what policy framework governs it. He notes that strategic asset allocation and flexibility are not mutually exclusive, since policies can keep long-term targets while using allowable ranges.
The third question concerns implementation: who holds discretion to make active decisions. Friedman argues that delegating some discretion to investment staff, who are typically better positioned than boards that meet periodically, is often necessary, with ranges, limits, approval thresholds, reporting requirements and escalation procedures providing oversight. The fourth concerns agency: TPA is often linked to incentive compensation tied to total portfolio outcomes, which can align staff with fund missions, though a blended approach may better reward specialized roles.
Friedman concludes that these four areas need not move in lockstep and that institutions can make incremental changes, such as improving whole-portfolio risk reporting or delegating more discretion within existing ranges, without a sweeping overhaul. He argues the more useful question is "Where can our current governance and investment process be improved?" rather than "Should we do TPA?"
Friedman proposes unpacking TPA into four risk-related questions that are relevant to nearly all institutional investors regardless of whether they use the label. The first concerns metrics: TPA generally emphasizes whole-portfolio risk measures over asset-class-specific constraints, though he notes most institutions will combine total fund and asset-class measures, since siloed focus can create blind spots while excessive whole-portfolio focus can complicate performance attribution. The second concerns controls: flexibility to rotate across asset classes is often associated with TPA, but Friedman argues the key issue is how much flexibility is appropriate and what policy framework governs it. He notes that strategic asset allocation and flexibility are not mutually exclusive, since policies can keep long-term targets while using allowable ranges.
The third question concerns implementation: who holds discretion to make active decisions. Friedman argues that delegating some discretion to investment staff, who are typically better positioned than boards that meet periodically, is often necessary, with ranges, limits, approval thresholds, reporting requirements and escalation procedures providing oversight. The fourth concerns agency: TPA is often linked to incentive compensation tied to total portfolio outcomes, which can align staff with fund missions, though a blended approach may better reward specialized roles.
Friedman concludes that these four areas need not move in lockstep and that institutions can make incremental changes, such as improving whole-portfolio risk reporting or delegating more discretion within existing ranges, without a sweeping overhaul. He argues the more useful question is "Where can our current governance and investment process be improved?" rather than "Should we do TPA?"
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