Never waste a good crisis, so the saying goes.

A trio of Asia-based institutional investors certainly feel the Covid-19 pandemic has vindicated their decision to implement a so-called 'total portfolio approach' (TPA).

The group comprised senior executives from Australia’s Cbus and Future Fund and insurance firm Prudential, speaking on Tuesday (June 2) at a webinar hosted by AsianInvestor and technology vendor SimCorp.

The unprecedented market volatility unleashed by the outbreak has underscored the benefits of moving away from a traditional strategic asset allocation setup to a more collaborative, dynamic investment model, they argued.  

Sue Brake, Future Fund

“It’s times like this that really vindicate us, [given] the trust levels between the team members and some of the big decisions we were able to make very quickly [using TPA],” said Sue Brake, deputy chief investment officer of portfolio strategy at Future Fund. “It’s been a good test of the model and of our commitment to it.”

TPA relies on sharing real-time, entire-portfolio data across an institution and strong collaboration between investment teams. As such, it seeks to overcome the limitations of a traditional, siloed asset allocation approach.

It's been a challenging process to put in place the new model, admitted Brake. “We’ve got more work to be done, but we think it’s a more sensible way to run portfolios.”

Kristian Fok, CIO at A$56 billion ($38.6 billion) superannuation fund Cbus, took a similarly positive view of TPA, which his institution has been implementing.

“Having to manage through this very fast moving and changing and uncertain environment really highlighted the benefits of getting people that represent the whole portfolio in a room to really resolve the issue,” he said. “It created a greater focus and momentum around our team to want to move further in this direction.”

Kristian Fok, Cbus

Likewise, Prudential’s Singapore operation, while at an earlier stage of implementation than the Australian institutions, is already reaping benefits.

Covid outbreak has shown that “a collaborative model works better for us in this period”, said David Chua, head of investment strategy at Prudential Singapore. “Moving from a linear decision-making process towards a more outcome-focused, collaborative model has worked and is something we will grow and develop more.”

Accordingly, there is growing demand among asset owners for implementing a TPA model, agreed Tim Unger, senior investment consultant at Willis Towers Watson, and Marc Schröter, senior vice president at SimCorp, during the webinar.

QUICK REACTIONS

Indeed, Brake and Fok both pointed to specific benefits provided by the TPA model during the recent turmoil.

“We have real-time dashboards that can … give you any slice and dice of the portfolio you want to see,” Brake said.

This has afforded the A$162 billion ($111.6 billion) Future Fund the “great luxury through the crisis of being able to do scenario-type markdowns” on assets. It has allowed the teams to identify their impact on risk and currency hedging, thereby allowing them to make “timely hedging and rebalancing decisions”. 

David Chua, Prudential

“All of that’s been a big investment, and we think it’s been totally worthwhile,” added Brake.

Meanwhile, TPA helped Cbus cope with early member withdrawals after the government eased the rules on redemptions to help those struggling with finances amid the pandemic.

The move meant super funds “needed to re-prioritise liquidity”, Fok said. “The best way to address that was to bring different roles together.”

Cbus’s cash management team could “see what was going on the market”, and the fund’s portfolio-completion specialists could “help extract liquidity from different sources”.

“So having a common issue that we came together to manage really showed the benefits of [the TPA] approach,” Fok added.

IMPLEMENTATION CHALLENGES

All this being said, there are challenges and costs involved in implementing a TPA set up, as both Brake and Unger highlighted.

It would involve big changes to the culture of an institution that has been set up to conduct strategic asset allocation with teams in separate asset-class siloes, Unger said. And TPA requires a certain level of in-house investment, technology and data capabilities that many asset owners do not possess.

But such a model is better suited than a traditional SAA to the complexities of today’s investment landscape, given the huge number of asset classes and strategies now on offer, Unger said.

What’s more, Willis Towers Watson estimates that a properly implemented TPA can produce an additional 50 to 100 basis points of return over a typical SAA process, while also reducing risk.

Accordingly, Unger and his firm hold the strong belief that TPA will become more widely adopted by asset owners over the next decade.