TPA: Built on essentials, shaped by levers

As asset owners grapple with the appropriateness of a total portfolio approach for their fund, new ICPM research has outlined the building blocks that should be considered in the process including essential TPA “enablers” and optional “levers”.

While all TPA iterations need to be underpinned by supportive governance structures and total portfolio culture, the extent to which they integrate optional elements such as incentive architecture will determine what their flavour of TPA looks like in practice.  

ICPM managing director and co-author of the paper Adrian Trollor says of all the essential building blocks, establishing a TPA culture is the most challenging. This refers to re-gearing the organisation from siloed asset class operations towards a mindset of total portfolio collaboration.

“[Collaboration] is not necessarily something that career investors in a singular area are most easily able to adapt to. The SAA approach has been relatively easy in that sense, but establishing a culture around TPA is probably one of the things that funds struggle [with] the most,” Trollor, who was formerly head of portfolio delivery at TCorp, tells Top1000funds.com.

“Culture is a more delicate component of investing that takes longer to understand.”

Other building blocks which all TPA frameworks must have include a supportive governance structure at the board level, the evaluation of investment against total fund goals and accurate whole-of-portfolio data.

But optional TPA levers which investors can commit to in various degrees include, for instance, the incentive structures. Some funds exclusively link rewards to total fund outcomes while others include KPIs in specific areas of expertise.

Another way through which funds have been encouraging total portfolio thinking is by hiring talent aligned with TPA culture, Trollor says.

“Interestingly enough, funds are deliberately recruiting for a particular individual that is able to support the TPA culture,” he says.

“Sometimes those individuals tend to be more collaborative, potentially less specialised, but certainly able to step outside their immediate specialist domain and think about the total portfolio in an engaged way across teams.”

Global case studies

The paper gives some specific examples of how funds integrate TPA into incentive plans to illustrate the point. For Australia’s Future Fund and New Zealand Super, both of which are funds with “fully integrated” TPA models, their investment team’s variable compensation is entirely tied to total portfolio outcomes, the report said.

But for funds like Australia’s Victorian Funds Management Corporation, which adopts a “hybrid” TPA model that has more of an “emphasis” on total portfolio outcomes rather than being purely driven by them, incentive setups vary by roles.

VFMC recently formed a portfolio management group (PMG) which now oversees the unified strategy, implementation and risk functions.

“Total portfolio outcomes are the largest component for the PMG team and a lower but still significant component for the asset class teams. Individual key performance indicators include a contribution to the organisation and culture has a fixed share for all team members,” the report said.

CPP Investments, which the report said adopts a “partially integrated” TPA model where each asset class is focused on generating alpha but with a separate total portfolio group and overlays, has yet another form of incentive architecture.

The standalone total portfolio group at CPP Investments steered the fund away from asset class silos towards a single, macro-factor driven portfolio management approach which includes “centralised liquidity, centralised FX management, an internal capital-markets ‘balancing’ capability and a relative-value process that assesses public and private opportunities on an equal footing”.

But a large internal investment team at CPP Investments means “decentralisation is necessarily part of the organisational design”, the report said. Asset class teams have autonomy to make alpha-generating decisions within their asset classes.

Incentives for some parts of the CPP Investments’ team hence contain asset class-specific elements, with additional levers to incentivise total fund behaviours.

Trollor says the starting point at which funds begin the TPA adoption matters, as a newly established fund may be able to set up the process with greater ease than a large organisation with set investment processes.

The extent to which an allocator will be able to integrate TPA comes down to several factors including, for example, the number of stakeholders they have. Multi-stakeholder organisations may find a fully integrated TPA model harder and longer to implement due to the extensive communication and coordination needs.

Funds with larger internal investment teams, which makes close collaboration a more strenuous activity, will also find a fully integrated TPA model harder to implement.

“Hopefully for funds that are thinking about a TPA journey, [this report] tells them that they need to think pretty deeply and strategically about where this organisation should end up on that spectrum, because there’s a whole heap of sort of organisational context that drives that,” Trollor says.