Aligning portfolios with purpose: The total portfolio approach.
Moving beyond asset class decisions to focus on the outcomes institutional portfolios are built to support.
Aligning portfolios with purpose: The total portfolio approach.
Overview
Institutional portfolios are created for their specific purpose. For some organizations, that purpose is providing a stable base to support spending. For others, it’s meeting defined benefit obligations, managing funded status, controlling expense, or meeting a termination goal.
The recent industry discussion around the “total portfolio approach” (TPA) is helpful because it supports the idea that portfolio decisions should be judged by how they affect the whole organization, not by how they look within a single asset class or how they perform relative to a benchmark.
For SEI, this way of thinking is not new. Our decades-long approach has been to focus on linking investment strategy to client objectives, using risk analysis, short-term capital market assumptions, portfolio construction, and scenario-based modeling (both stochastic and hybrid deterministic) to understand how decisions may affect real-world outcomes. At the same time, understanding the changing landscape of capital markets is also a significant input into decision-making. The terminology may be evolving, but the underlying methodology has consistently been part of our approach from the start.
Why a total portfolio approach matters
A portfolio can look well diversified on paper and still disappoint if it does not perform well against a client’s actual goals or concerns. A total portfolio approach starts with a client’s concerns and risk exposures, then evaluates how each asset class combines with the rest of the portfolio to affect client-specific outcomes. The variation in measurement and outcome can be demonstrated by the examples below:
- Corporate defined benefit plans may focus on funded status, contribution volatility, pension expense, or termination goals. This is managed largely through liability-driven investing (LDI) strategies, which, by nature, are a total portfolio approach when managed appropriately.
- Taft-Hartley plans require similar payout obligations to corporate defined benefit plans but are subject to different measurement standards and therefore require a different approach.
- For an endowment, foundation, or other nonprofit, TPA can mean supporting spending needs on an ongoing basis, designating and designing funds for specific purposes, and examining inflation impacts on purchasing power.
This focus on client-specific differences led SEI to many of the same conclusions now associated with TPA, dating back to the early years of the Institutional business. Client discussions serve as a discovery period, helping to refine the approach beyond the constraints listed above.
SEI’s total portfolio approach in practice
A TPA becomes most useful when it shapes the actual decision-making process. In our work with institutional clients, this means connecting investment analysis to the client’s full set of objectives and constraints.
Building from appropriate assumptions
Capital market assumptions (CMAs) must be built with a specified time frame in mind. While long-term assumptions might be useful for EROA (Expected Return on Assets) purposes for corporate DB plans, short-term assumptions (10-year) are more applicable for a TPA. Short-term CMAs reflect the current yield curve, credit spreads, equity valuations, and many other market variables on a timely basis. The contribution of each asset class to total portfolio risk is also taken into consideration. This must be viewed in light of the risks that are most relevant to the client.
Aligning asset classes with client goals
Asset-class decisions are evaluated regularly based on how they interact within the total portfolio, rather than in isolation. Consideration is also given to practical and client-specific concerns such as liquidity, interest-rate sensitivity, inflation sensitivity, cash-flow certainty, and outside assets, all within the context of the client’s overall risk tolerance. Pacing of liquidity and cash flows can also be tailored to client-specific needs through SEI’s fixed income trading desk in a laddered bond or horizon-matching approach, or through designated liquidity pools.
Understanding total portfolio risk
SEI uses the following risk considerations: stress testing with current market data, stochastic modeling to show ranges of outcomes, and reviews of other risk measures, including maximum drawdown, funded ratio volatility, risk-adjusted return, and related measures.
Defining risk in client terms
The most relevant risks differ by client. Examples include funded-status volatility, contribution or fundraising requirements, spending stability, or the ability to sustain the fund over a short-term, long-term, or perpetual time frame.
Proper interpretation of modeling
Stochastic analysis helps show a range of possible outcomes, including unfavorable paths that may matter most to decision-makers. However, undue emphasis is often placed on stochastic medians, when the full distribution should be considered. Scenario analysis and stress tests illustrate economic paths that may be of special concern to a client and their business or mission. The pairing of these two methods is vital: stochastic results express distributional ranges, while scenario analysis helps explain the types of economic conditions that may be embedded within different percentile outcomes.
This is why the total portfolio approach can be valuable for committees and boards. It provides a clearer way to organize investment conversations around the decisions that matter most: what the portfolio is designed to accomplish, what risks could interfere with that objective, and how different allocations can impact outcomes.
Conclusion
The total portfolio approach encourages investors to keep the focus where it belongs: on client objectives, risk, portfolio durability, and long-term outcomes. For SEI, this is consistent with the way we have approached institutional advice for decades.
A TPA, therefore, is not simply a collection of analytical tools; it is a disciplined framework for connecting those tools to client-specific decisions. Current market conditions, forward-looking assumptions, stochastic modeling, and scenario analysis all help frame the discussion, but the ultimate test is whether the portfolio remains aligned with the client’s objectives across a range of possible economic environments.
Want to learn more?
Contact us to discuss how SEI can apply the total portfolio approach to help align investment strategy with the outcomes your organization is working to achieve.
For a glossary of terms, visit our financial glossary.
Information intended for institutional investor use and provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company.
This material represents an assessment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research, tax, or investment advice and is intended for educational purposes only.