WTW’s Urwin defends TPA value-add as attribution scrutiny intensifies

Roger Urwin, one of the industry’s most well-known proponents of the total portfolio approach, has rejected criticism questioning the approach’s true value-add, arguing that “there is no attribution to TPA” as it is an interwoven system spanning fund goals, risk and asset mix.

In an interview with Top1000funds.com, Urwin, who is co-founder of Thinking Ahead Institute and global head of investment content at WTW, says the industry is “asking for something unrealistic, unfortunately, which is a proof statement for every investment idea,” when it comes to attributing any performance edge of TPA over strategic asset allocation.

Previously a Thinking Ahead Institute peer study of 26 asset owners found “TPA-adopter organisations outperformed the SAA organisations over the last 10 years by a very substantial 1.3 per cent a year.”

The study, which has been widely cited as evidence of TPA’s potential to add value, concludes “it does appear that TPA can be considered a significant performance factor.”

But with the meteoric rise of TPA in recent years and allocators more closely interrogating the underlying thesis, that performance attribution has been called into question by funds including the Teacher Retirement System of Texas whose chief investment officer Jase Auby labelled the estimate as “aggressive”.

Stephen Gilmore, who is the CIO who spearheaded CalPERS’ effort in officially adopting TPA beginning this July, also gave a more modest estimate of the performance uplift he expects to get from the pivot at 50-60 basis points.

“[The value-add of TPA] is a gorilla in the room [sic] subject to some extent, because people in our industry I think are asking for something that is unrealistic,” Urwin says.

“They want it [the value of an investment idea] proved before they do something new, and I think that’s unrealistic, unfortunately, because in a system, things change, and context is everything.”

Urwin highlights some caveats of the original 2024 study that produced the 130-basis points value-add number, including that it had a small sample size of 26 funds and that the TPA funds shared some common characteristics such as large exposures to private markets which has pushed up performance over the long-term.

“One or two people say you shouldn’t really be publishing that [number], but I think transparency is pretty important as well as clarity. So it’s on that basis that that’s a really interesting conversation,” Urwin says.

“One of the big things that we’re trying to do in the industry is to encourage people to make more reference to multiple comparators – how many of these [TPA] funds are meeting their goals? Because of course TPA itself is just measured in these absolute returns, but that’s not taking account of what the fund goals are, including the risk parameters and local conditions.”

The theoretical and practical frameworks of TPA have come a long way compared to two decades ago when it was deemed a novel practice among selected sovereign wealth investors. Some of the most prominent TPA practitioners today are all early adopters of the approach in the 2000s including CPP Investments, the Future Fund and New Zealand Super.

But some allocators believe that, constrained by mandates and team resources, TPA is likely to detract from organisational efficiencies rather than adding to it. Monte Tarbox, CIO of NYC Bureau of Asset Management recently argued that in fact, most US pension funds lack the “strategic depth” to trade frequently and make tactical bets with market fluctuations as needed under TPA and the appropriate governance structure to enable the approach.

Urwin concedes there will be some funds that just aren’t set up for TPA which is why the conversation always needs to take fund governance and organisational structure into consideration.

For US public pension funds in particular, the picture is complicated by the prevalence of political presence on their boards which often leads to short-term decision-making and a lack of delegated authority to executive staff, both necessary conditions for TPA successful implementation.

“They actually have quite a strong governance model through the political body that is the source of the trusteeship. They’ve got state officials, and they’ve got politics to angle it. As a result, they don’t really have a domain culture – they have a political culture,” Urwin says.

“The internal team is able to drive a certain amount of change, you could say, but the boards are tending to sit back and say that we’re okay.”

Managers on the move

But apart from allocators, Urwin observes that one development that has picked up speed this year is that asset managers are reshaping their product offerings around how their clients invest under TPA.

“In no particular order: KKR, Apollo, BlackRock, Schroders, AB, AQR, all of those organisations have published white papers, and are trying to help their clients to frame their thinking about it, but all of them are saying we’re thinking in total portfolio terms,” Urwin, who was also a contributor to papers by Bridgewater and the CFA Institute, says.

Managers are used to thinking in “sleeve mandates” as defined by asset classes but more are trying to grapple with having a different relationship with TPA organisations.

“There’s a lot more customisation that is in the pipeline because of TPA, and that can only be good, but the organisation’s and the industry’s bandwidth is, I think, somewhat stretched by that because it’s going to be difficult for everything to become customised. You do need something of a building block approach in TPA.

“There are a lot of TPA funds where the ask of the manager hasn’t really changed yet, but something meaningful is going on at the top of the house.”

In recent CFA research, which Urwin co-authored with the institute’s senior manager of macrosystems and foresight Genevieve Hayman, prominent asset managers also shared their perspective that understanding how asset owners operate under TPA is intrinsic to their mandates. Among the paper’s contributors are long-term TPA practitioners including former CIO of OTPP Ziad Hindo, CalPERS CIO Stephen Gilmore and NZ Super co-CIO Will Goodwin.

“I think it’s incumbent on asset managers to try to understand how those asset owners are thinking, what are their vulnerabilities, and how we can be part of a solution to help increase the resiliency of their portfolios by building solutions that directly address those vulnerabilities rather than just presenting a menu of products,” said Bridgewater head of core client service Jessica Oleson.