COVID-19 has reinforced the urgency for asset owners to rethink how they effectively build portfolios and manage risks. The agility needed to react to sudden market changes while achieving optimal risk-adjusted returns is paramount today—and will be increasingly relevant amid the uncertainty of a post-pandemic world.
The economic fallout from the volatility and persistent low yields (including negative rates) has compounded challenges for asset owners. They were already grappling with increasingly complex portfolios and datasets, stemming from waves of new products and investment strategies, multiple siloed systems and incohesive risk management across all asset classes. In response, many are now considering what has become known as a “total portfolio approach.”
The Total Portfolio Approach (TPA), implemented by a growing crop of leading asset owners globally, offers an increasingly viable option to address the unpredictability of markets—including the governance, benchmark and inertia drags inherent in more traditional Strategic Asset Allocation (SAA)-based methodologies.
By basing asset allocation on risk exposure—rather than rigidly-defined asset-class benchmarks—and assessing it continuously in real time and across the entire investment team, TPA promises much more nimble and flexible decision making. In turn, it enables asset owners to quickly react to opportunities and, ultimately, produce a diversified portfolio that is more robust in uncertain times.