Capital Decanted: Episode Rewind - Top Episode #4 Summary

Episode Information:

• Title: Top Episode Rewind: Fan-Favorite #4
• Release Date: July 30, 2024
• Host: John Bowman & Christy Hamilton
• Guests: Ben Simield (CIO of Future Fund) & Jane Bach (Head of Investments for Asia at WTW)
• Sponsor: Franklin Templeton Alternatives

Introduction

In the fourth fan-favorite episode of Capital Decanted, hosts John Bowman and Christy Hamilton delve deep into the evolving landscape of capital allocation with a focus on the Total Portfolio Approach (TPA). This episode not only revisits insightful discussions from past episodes but also enriches them with firsthand experiences from industry leaders Ben Simield and Jane Bach. The conversation navigates through the inception, evolution, and practical implementation of TPA, contrasting it with the traditional Strategic Asset Allocation (SAA) model.

Historical Evolution of Portfolio Construction

John Bowman opens the episode by recounting the early days of exploring TPA with industry stalwarts, highlighting the transformative journey from conventional methods to innovative portfolio strategies.

• Key Insights:
  • Total Portfolio Approach (TPA) emerged as a response to the limitations of SAA, emphasizing a holistic view of portfolio construction.
  • Benchmarks like the Norwegian Model, Endowment Model, and Canadian Model laid the groundwork, each progressively enhancing diversification and investment sophistication.
  • Ben Simield and Jane Bach provide firsthand accounts of how their respective organizations transitioned to TPA, stressing the importance of collaboration and continuous evolution.

Notable Quote:

Ben Simield, CIO of Future Fund (12:15):
"TPA gives us the flexibility to lean into opportunities as they arise, ensuring our portfolio aligns with our long-term mission rather than being confined by rigid asset class silos."

Defining Total Portfolio Approach vs. Strategic Asset Allocation

The hosts and guests meticulously distinguish TPA from SAA, outlining three primary differentiators: Governance, Portfolio Building Blocks, and Culture.

1. Governance:

   • Reference Portfolio & Risk Budget: Unlike SAA, which relies on predefined asset class allocations, TPA utilizes a reference portfolio that defines the portfolio's risk tolerance.
   • Absolute Return Goals: TPA sets benchmarks based on absolute return targets (e.g., CPI + 3%) rather than relative performance against market indices.

   Notable Quote:

   Ben Simield (18:40):
   "Governance in TPA is the fulcrum on which success depends. Without a robust governance structure, TPA cannot thrive."

2. Portfolio Building Blocks:

   • Holistic Allocation: Every investment, regardless of asset class, competes on its merit to contribute to the overall portfolio.
   • Factor Analysis: Incorporating factor-based strategies to assess and manage portfolio risks and returns comprehensively.

   Notable Quote:

   John Bowman (23:10):
   "TPA forces us to think about every marginal dollar's opportunity cost across the entire portfolio, breaking down the silos that SAA perpetuates."

3. Culture:

   • Collaborative Mindset: TPA fosters a culture of collaboration, where investment teams work collectively towards shared portfolio objectives.
   • Aligned Incentives: Compensation structures are redesigned to reward contributions to the overall portfolio performance rather than individual asset classes.

   Notable Quote:

   Christy Hamilton (29:24):
   "TPA requires a state of mind where every team member is aligned with the portfolio's total outcomes, rather than just their siloed performance."

Implementation and Challenges

Transitioning to TPA is depicted as an intricate process that necessitates significant change management, leadership commitment, and cultural shifts within organizations.

• Key Steps:

  • Governance Redesign: Establishing a reference portfolio and setting absolute return goals.
  • Cultural Transformation: Encouraging open communication, collaboration, and aligned incentives across departments.
  • Process Adjustment: Moving from asset class-specific strategies to a unified portfolio-centric approach.

• Challenges:

  • Inertia and Resistance: Overcoming entrenched beliefs and practices rooted in SAA.
  • Distributed Teams: Implementing TPA in organizations with geographically dispersed talent.
  • Complex Decision-Making: Facilitating numerous stakeholder conversations to align on portfolio strategies.

Notable Quote:

Ben Simield (74:39):
"Transitioning to TPA is challenging because it requires endless conversations and a fundamental shift in how we approach investment decisions. It's not just a model; it's a new way of thinking."

Benefits and Performance Outcomes

Proponents of TPA, including Ben Simield and Jane Bach, argue that this approach leads to superior performance, citing outperformance benchmarks and enhanced portfolio resilience.

• Performance Advantages:
  • Outperformance: TPA organizations have reportedly delivered between 50 to 100 basis points of outperformance relative to SAA frameworks.
  • Flexibility and Adaptability: Enhanced ability to respond to macroeconomic shifts and emerging opportunities.
  • Holistic Risk Management: Better understanding and management of portfolio-wide risks through factor analysis and integrated strategies.

Notable Quote:

Christy Hamilton (94:45):
"TPA organizations deliver between 50 to 100 basis points of outperformance relative to traditional SAA, largely due to their holistic and flexible approach to portfolio management."

Practical Insights and Recommendations

Jane Bach and Ben Simield offer practical advice for organizations contemplating a shift to TPA:

1. Assess Organizational Readiness:

   • Evaluate current governance structures, investment processes, and cultural alignment.
   • Determine if existing problems, such as siloed decision-making or misaligned incentives, can be addressed through TPA.

2. Start with Incremental Changes:

   • Implement components of TPA, such as enhanced cross-departmental communication or revised compensation models, before a full-scale transition.

3. Emphasize Leadership and Change Management:

   • Secure strong leadership commitment to drive the cultural and operational changes required for TPA.

4. Leverage Best Practices and Thought Leadership:

   • Utilize resources from organizations like the Thinking Ahead Institute to guide the implementation process.

Notable Quote:

Jane Bach (86:07):
"Transitioning to TPA is a complex change management exercise that requires strong leadership and a clear understanding of why you're making the shift. It's not something that can be done overnight or without careful planning."

Future Implications and Systemic Changes

The episode concludes with discussions on the broader implications of widespread TPA adoption:

• Impact on General Partners (GPs) and Consultants:

  • GPs need to adjust their pitching strategies to align with TPA’s holistic investment mindset.
  • Consultants must evolve their taxonomies beyond asset class-based frameworks to support TPA clients effectively.

• Educational and Institutional Adjustments:

  • Investment education programs may need to incorporate TPA principles to prepare future asset managers.
  • Institutional policies and governance frameworks might be restructured to support TPA methodologies.

Notable Quote:

John Bowman (97:28):
"If institutions adopt TPA, General Partners need to rethink how they pitch strategies and how consultants support them, ensuring alignment with a more holistic investment perspective."

Personal Anecdotes and Closing Remarks

In a lighter segment, hosts and guests share personal stories about meeting their spouses, emphasizing the blend of professional rigor and personal connections within the industry.

• John Bowman’s Story:

  • Met his spouse through athletic events in college, highlighting the importance of teamwork and collaboration both personally and professionally.

• Christy Hamilton’s Story:

  • Met her husband via social media, showcasing the modern dynamics of personal connections in the digital age.

Final Thoughts: John Bowman and Christy Hamilton wrap up the episode by reinforcing the significance of TPA in modern asset management, acknowledging its challenges, and celebrating the collaborative efforts of industry leaders like Ben Simield and Jane Bach in pioneering this transformative approach.

Closing Quote:

John Bowman (101:22):
"TPA isn't just a model; it's a journey of collaboration, trust, and a shared mission to align our investments with our long-term purpose. It's about ensuring that every decision we make serves the greater good of the portfolio and its stakeholders."

Conclusion

This episode of Capital Decanted serves as a comprehensive exploration of the Total Portfolio Approach, offering listeners valuable insights into its principles, benefits, and implementation challenges. Through engaging discussions with industry leaders, the podcast underscores the transformative potential of TPA in reshaping capital allocation strategies for enhanced performance and alignment with organizational missions.

Recommended Listen: For those interested in the intricate dynamics of capital allocation and innovative portfolio strategies, tuning into this episode provides a wealth of knowledge and practical takeaways from the forefront of the asset management industry.