Thinking Outside the Benchmark: Part II

Thinking outside the benchmark requires institutional investors to break away from the traditional asset class lines that apply to most portfolio construction processes. Most versions of strategic asset allocation focus on just that—on asset classes. This builds into the complementary concept of a total portfolio approach (TPA) that advocates that institutional investors step away from traditional asset class buckets and consider economic factors that drive the risk and return profile for a pool of capital. Every investment is broken down into its main economic drivers and then added to the total portfolio to assess its overall risk and return profile. Asset class lines become descriptions, but not restrictions, on how the portfolio is constructed. An example of TPA is the investment focus on environmental, social and governance (ESG) investments. ESG is more a theme and less an asset class, and it has the potential to allow investors to think outside of benchmarks and away from traditional asset class descriptions.