The total portfolio approach is gaining interest as a new investing strategy for pension funds and other asset owners, but its novel status may be deceiving.

Indeed, the concept behind this approach has been at the core foundation of modern portfolio theory since the days when Nobel Prize winner Harry Markowitz showed that maximizing the risk-adjusted return of the total portfolio could lead to high average returns and low volatility.

What is new and interesting is that, since the mid 2000s, some institutional investors in countries such as Australia, Canada, New Zealand, Scandinavia and Singapore have redesigned their entire investment framework to maximize the benefits of a total portfolio approach.

Driven by the net-zero pledge towards green investments, institutional investors are finding themselves uncomfortably wedged between a rock and a hard place.

Are our pension funds investing too little at home? Yes, according to a large group of business leaders in an open letter to the Canadian government. Finance academics who have long studied this question would disagree.

Retiring baby boomers are in an era of decumulation anxiety, as they convert their pension assets into income that they fear won’t hold up over the entirety of their retirement.

Pension funds spend billions on active investments that aim to generate “alpha” – the extra value above and beyond risk-adjusted returns. The problem is that in the long and complex chain of industry players connecting the real economy to the financial sector, pension funds are at the bottom of the value-creation chain.

The most difficult task for pension fund managers is to properly calibrate risk and return to make sure that pensioners earn a steady income after retirement.

The combination of ultra-low interest rates and high longevity is putting a major strain on retirement systems across the globe. A recent report by the World Economic Forum predicts that the global gap between retirement savings and retirement needs will reach $400trn by 2050.

With the global push toward sustainable investment, investors are concerned about whether the cost of investing green will result in lower portfolio returns in the long term. Are there win-win strategies where green investments can generate high returns alongside positive environmental impact?

The increasingly charged and polarized politics surrounding the climate crisis have asset managers between a rock and a hard place when considering their investment strategy. Should they abruptly divest from stocks of fossil fuel industries?

The need to address the environmental impact of investments is clear, but what is less obvious is how to scale down fossil fuel investments in a way that balances the interests of all the stakeholders involved. Should fund managers be making rapid, definitive decisions to completely divest from fossil fuel stocks, or should they consider withdrawing progressively?

The U.S. pension system, the Defined-Benefit (DB) model, in which employers commit to paying a pension to employees for as long as they live, is disappearing quickly among American businesses and is being replaced with the Defined-Contribution (DC) model where employees become responsible for their retirement.

The value premium:
When a firm is listed on the stock market, the value of shareholders’ equity can be measured using both accounting and market-based methods. Accountants compute the book value of equity from the firm’s balance sheet. Since the stock is also continuously traded on the exchange, the market value of equity can be obtained by multiplying the stock price by the number of shares outstanding.

One of the long-standing puzzles in finance is that the stocks of firms with high book values proportionately to their market values (value stocks) tend to earn higher returns on average than stocks with the opposite characteristic (growth stocks). The difference in performance between value and growth stocks, called the value premium, is high in most markets, including the United States and the United Kingdom.