The Market’s Biggest Whales are Making Huge Changes: Total Portfolio Revolution | Steve Novakovic of CAIA
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this insightful episode, Max Wiethe interviews Steve Novakovich, Managing Director of Educational Programs at CAIA, exploring the monumental shift from Strategic Asset Allocation (SAA) to the Total Portfolio Approach (TPA) in institutional investing. The conversation covers CalPERS' recent governance change to TPA, marking a significant milestone for U.S. pension plans. (00:45) Novakovich provides expert analysis on private markets, including the evolving secondary markets that are providing crucial liquidity solutions amid slowed distributions and the denominator effect. The discussion also examines the friction between hedge fund fees and beta-heavy returns, while addressing the critical need for education as alternative investments become more accessible to retail wealth through evergreen funds. (56:57) The episode concludes with insights into CAIA's 2026 educational initiatives designed to help investors navigate this complex landscape.
- Main Theme: The transition from traditional asset allocation models to more dynamic portfolio management approaches and the implications for institutional investing, manager relationships, and investor education.
Speakers
Steve Novakovich
Steven Novakovich serves as Managing Director of Educational Programs at CAIA (Chartered Alternative Investment Analyst Association), where he leads the development of educational resources for alternative investment professionals. He brings extensive experience as a former allocator, having worked at a U.S. endowment under the Strategic Asset Allocation model, giving him unique insights into both sides of the institutional investment landscape. His background in portfolio management and governance transitions makes him a leading voice in the industry's shift toward the Total Portfolio Approach.
Max Wiethe
Max Wiethe is the host of "Other People's Money" podcast, where he explores institutional investing, alternative assets, and capital allocation strategies. Based on his deep industry knowledge and interviewing style, he brings sophisticated questions about market dynamics, governance changes, and investment strategy evolution to help listeners understand complex financial topics.
Key Takeaways
Governance Revolution: From Board Control to Staff Delegation
The shift from SAA to TPA represents a fundamental change in decision-making authority within institutional investors. (04:44) Under traditional SAA models, boards maintain tight control over asset allocation decisions and often approve individual investments above certain thresholds. In contrast, TPA delegates these tactical decisions to investment staff while boards focus on overall portfolio objectives and return targets. This change requires boards to relinquish significant authority and place greater trust in their investment teams, representing a major cultural and operational shift for slow-moving institutional ships like pension plans.
Opportunistic Investing Becomes Possible
TPA enables more nimble, opportunistic decision-making compared to the rigid constraints of SAA. (12:22) Novakovich shares examples of TPA investors making dramatic tactical moves, such as neutralizing fixed income exposure when rates hit zero by using derivatives. While SAA investors might tactically adjust within narrow bands (moving from 20% to 23% in an asset class), TPA investors can make substantial shifts from 20% to zero or 10% to 30% when opportunities arise. This flexibility proves particularly valuable in volatile, post-COVID environments where quick responses to market dislocations can add significant value.
Benchmarking Simplifies to Total Portfolio Focus
TPA fundamentally changes how performance is measured and evaluated. (07:26) Instead of benchmarking each asset class separately (private equity vs. private equity benchmarks, real estate vs. real estate benchmarks), TPA uses simple, high-level benchmarks like 70/30 stocks and bonds for the entire portfolio. This approach allows investment teams to pursue the best opportunities across all asset classes without being constrained by asset class-specific targets, while boards focus on whether the total portfolio meets its overall objectives rather than scrutinizing individual allocation performance.
Manager Selection Becomes Cross-Asset Competition
Under TPA, fund managers no longer compete just within their asset class but across the entire investment universe. (17:29) This creates a "best ideas" mentality where a real estate opportunity might lose out to a private debt strategy if the latter better serves the portfolio's current needs. Managers must now understand and articulate how their strategies support the LP's broader portfolio objectives rather than simply competing against similar strategies. This shift benefits larger, multi-product GPs who can offer various solutions, while potentially challenging single-strategy, niche managers who may have fewer opportunities to engage with TPA investors.
Secondary Markets Provide Strategic Portfolio Management Tools
The secondary market has evolved from a niche solution to a mainstream portfolio management tool for LPs seeking liquidity and diversification. (31:36) For newer investors, secondaries offer immediate NAV deployment and vintage year diversification that would otherwise take years to achieve through primary commitments. Current secondary discounts for quality buyout portfolios range from 5-10%, while continuation funds provide opportunities for new LPs to access previously closed relationships. However, LPs must understand that selling on the secondary market typically ends their relationship with that GP, making it a significant strategic decision beyond just liquidity management.
Statistics & Facts
- According to PitchBook data mentioned by Novakovich, approximately 25% of liquidity events in the most recent year came through continuation funds, highlighting how these vehicles are reshaping private equity exits. (26:05)
- The hedge fund industry has grown from approximately $1 trillion in 2005 to $4-5 trillion today, contributing to spread compression and reduced alpha opportunities in certain strategies. (50:57)
- Goldman Sachs data cited in the episode shows hedge fund long-only products with $600 billion in assets under management delivered 200-300 basis points of outperformance over five years ending in 2024. (48:43)
