Is Total Portfolio Approach (TPA) just a fancy new term for common sense? That’s the question many are asking after CalPERS made headlines as the first US pension fund to adopt this strategy. But here’s where it gets controversial: while some see TPA as a groundbreaking shift, others, like Ben Cotton, CIO of the $80 billion Pennsylvania Public School Employees Retirement System (PSERS), argue it’s simply repackaging what pension funds should already be doing.
CalPERS’ historic move, approved after months of internal debate, is another feather in the cap of CIO Stephen Gilmore. Before joining CalPERS, Gilmore led investments at NZ Super, a pioneer in TPA, alongside heavyweights like Canada’s CPP Investments and Australia’s Future Fund. Yet, not everyone is convinced this acronym-driven approach is necessary.
In an exclusive interview with Top1000funds.com from PSERS’ Harrisburg office, Cotton, who joined the fund in 2023 to strengthen governance after a 2021 performance reporting issue, shared his perspective. “It’s fascinating that we need a new acronym to focus on what should be common sense,” he said. “A lot of allocators have fallen into the trap of working in silos, making decisions for individual allocations rather than the portfolio as a whole. I’ve always taken a holistic approach to investing, and adding a label doesn’t make it a new strategy.”
Cotton views TPA as simply aligning investments with available opportunities. PSERS already has flexible allocation targets, allowing deliberate overweights or underweights. The board has long trusted the investment team to rebalance and adjust allocations within the strategic framework. “We always ask ourselves: Are we maximizing the whole portfolio, or just a single silo? The former is clearly the better path,” he explained.
PSERS is largely on track with its asset allocation, except for a slight overweight in cash and underweight in long-duration fixed income. Deviating from the long-term strategy requires strong conviction, which Cotton believes is hard to come by in today’s uncertain market. “You need high conviction to stray from your plan, so we’ve moved closer to our targets in this environment,” he noted.
A prime example of PSERS’ adaptability is its recent decision to eliminate its 5% leverage allocation. “When cash yields are near zero and leverage costs are low, a modest amount of leverage can boost returns. But when leverage costs rise to match the risk premium, it introduces unnecessary uncertainty in both returns and liquidity,” Cotton explained.
Another instance of Cotton’s holistic approach is PSERS’ decision to drop its FX hedging strategy. For 14 years, the fund hedged 70% of its developed market currency exposure, reducing volatility and boosting returns. However, the Trump administration’s reshoring policies shifted the landscape. “A weaker dollar makes it easier to bring assets back to the US and compete globally. On balance, we decided to remove the hedge,” he reflected.
Interestingly, this move hasn’t increased equity portfolio volatility, and other funds are now following suit. “Most public funds weren’t hedging to begin with, and one that did recently dropped it just before us,” Cotton added. PSERS’ 64% funded status also influenced this decision. “Hedges require cash and create transaction costs. In a liquidity-focused period, we want to avoid surprises,” he said.
This funded status also shapes broader decision-making. A strong funding ratio allows more market flexibility, but funds with large deficits must take on minimum risk. “Our funded ratio limits our ability to de-risk, as it exposes us to inflation while we pay out liabilities,” Cotton explained.
Liquidity concerns also led Cotton to cap PSERS’ private markets allocation at 30%, which would have ballooned otherwise. When he joined, the allocation was 8% overweight, but moderating pacing, selective manager choices, and selling older assets kept it in check. “If we’d followed historical pacing models, we’d be significantly overallocated,” he said. PSERS also benefited from selling private assets in the secondary market near par, boosting liquidity and reinvesting proceeds strategically.
Despite private markets’ growing share of the investable universe, Cotton remains cautious due to high capital costs and uneven distributions. “Distributions are still challenging, and activity is slower than ever,” he noted. He’s also mindful of fees, keeping PSERS’ load closer to 1:11 than the typical 2:20. “This isn’t just about negotiation—it’s about leveraging our scale and relationships,” he said.
Rebuilding trust between PSERS’ investment team and the board has been a key focus. Cotton has prioritized transparency, particularly around investment fees, and improved how the team presents information. “Transparency isn’t just about sharing data—it’s about providing context to answer the board’s questions,” he emphasized. This has led to increased delegation, boosting efficiency. “We used to need board approval for every GP commitment, even for long-term relationships. Now, we have delegated approval for certain mandates, streamlining decisions,” he concluded.
But here’s the real question: Is TPA a revolutionary strategy or just a rebranding of sound investment principles? And this is the part most people miss: Does adding another acronym truly add value, or does it risk complicating what should be straightforward? Share your thoughts in the comments—let’s spark a debate!
