The $556.3 billion California Public Employees’ Retirement System is looking to change the way it invests — and some strategists think the proposed approach could be as game-changing as the Yale Model.
At its September 15 investment committee board meeting, CalPERS CIO Stephen Gilmore formally recommended the state pension adopt the total portfolio approach (TPA) championed by sovereign wealth funds like Singapore’s GIC and Australia’s Future Fund.
TPA is a strategy where every investment is judged by its contribution to the entire portfolio’s goals, not just its own asset class. Unlike traditional strategic asset allocation, which relies on rigid silos, TPA uses risk factors as a common lens. This forces each investment to compete for capital and prove its value to the overall fund’s objectives.
In a 2024 paper promoting TPA as a necessary response to the shortcomings of SAA, the CAIA Association quotes Geoffrey Rubin, senior managing director at CPP Investments, as defining TPA as “one unified means of assessing risk and return of the whole portfolio.”
CalPERS’ proposed approach recommends a 75-25 equity-bonds reference portfolio as a new benchmark. It also suggests a 400-basis point active risk limit while keeping the current discount rate unchanged.
The pension fund’s own analysts acknowledge that adopting TPA “poses a meaningful change to the investment governance model.” The board plans to vote on the proposal later this fall.
While the term is new, the components for TPA have been around for a long time. As Capital Group’s senior asset allocation strategist Gene Podkaminer describes the strategy, it’s looking at the whole portfolio — assets and liabilities — through the lens of risk management.
“It’s about how they holistically come together,” Podkaminer told Institutional Investor. “These threads have coalesced and now it has a name which makes it real.”
Podkaminer, who recently released a paper championing TPA, believes that if CalPERS adopts TPA, it could have a trickle-down effect on allocators of all kinds and sizes and lead to widespread adoption of the model, not unlike what happened with the endowment model pioneered by Yale’s David Swensen.
“The Yale Model has cascaded down to all institutions, not just endowments. TPA is like that,” he said. “We can’t hold these [strategies] captive to just what’s going on with those mega plans with those massive staffs and massive resources.”
So why now? It boils down to a couple of factors, the first of which being that the technology is now here. Risk platforms like MSCI’s Barra, BlackRock’s Aladdin, and Northern Trust’s Venn, once used primarily for attribution, now allow asset owners to view the portfolio holistically and model forward-looking scenarios.
Plus, the information and knowledge are out there. With many large sovereign wealth funds having refined TPA for years (Gilmore hails from New Zealand’s Superannuation Fund), there’s now a large body of knowledge that investors of all sizes and complexities can draw from and adapt to their own portfolios.
However, while a cohort of asset owners is at the bleeding edge of defining, implementing, and communicating TPA, implementation of such an approach is complicated and time-consuming.
“I would caveat that it’s really hard to do this, especially when it comes to communications to stakeholders,” Podkaminer said. “It’s moving from a more total return approach where you’re really talking about how much return you’re able to achieve. Now it’s surplus and risk factors as well.”
Ultimately, however, Podkaminer believes TPA is the logical next step for allocators. “No pool of capital exists in isolation,” he said. “Looking at the uses of the assets and how they’re invested together just makes sense.”
