The Market’s Biggest Whales are Making Huge Changes: Total Portfolio Revolution | Steve Novakovic of CAIA

Episode Summary

Executive Summary: Steve Novakovich explains the industry shift from strategic asset allocation (SAA) to total portfolio approach (TPA), highlighting governance changes, faster decision-making, and more opportunistic investing. He also discusses how TPA changes manager selection, why private credit, private equity, secondaries, and hedge funds are being re-evaluated, and how Kaya is educating newer private wealth investors on alternatives.

Main Topics: Shift from SAA to TPA (Priority: 5/5): The conversation centers on the growing move away from board-directed strategic asset allocation toward a delegated total portfolio approach, with CalPERS cited as a major inflection point and signal to other allocators. Governance and delegation of authority (Priority: 5/5): Under SAA, boards often approve asset allocation bands and even individual investments; under TPA, investment staff gain authority to make portfolio and manager decisions while the board focuses on overall objectives. Benchmarking and portfolio evaluation under TPA (Priority: 4/5): TPA benchmarks are broader and outcome-oriented—such as a 70/30 stock-bond result or liability-based target—rather than granular asset-class benchmarks reviewed by boards. Opportunistic investing and tactical flexibility (Priority: 4/5): TPA enables larger, faster, and more responsive allocation changes, including moving from bonds to zero rates or rotating capital into short-lived market opportunities that SAA boards would struggle to approve. Manager implications across private markets (Priority: 4/5): Managers must compete on best ideas and portfolio fit rather than filling pre-set buckets, which favors multi-strategy GPs and challenges niche single-product firms. Liquidity, secondaries, and private market education (Priority: 4/5): The episode explores private equity distribution slowdowns, continuation funds, secondary sales, and the growing need to educate retail/private wealth investors about illiquidity, pacing, and risk. Hedge funds, beta, and fee sensitivity (Priority: 3/5): Novakovich argues hedge funds have struggled because beta has dominated returns, making 2-and-20 fee structures feel unjustified when LPs can capture similar or better returns passively.

Key Arguments: TPA is a major governance shift because it delegates portfolio construction and manager selection to staff instead of boards, changing how capital is allocated. CalPERS’ adoption matters symbolically because it may give other large institutions permission to reconsider entrenched SAA models. TPA does not eliminate benchmarking; it changes it from asset-class metrics to whole-portfolio outcomes and liability-aware objectives. A key advantage of TPA is speed and opportunism: allocators can respond to market changes without waiting for board meetings. In TPA, managers compete on whether they solve a current portfolio need, not simply whether they fit a predetermined asset bucket. Multi-strategy and platform GPs may benefit more from TPA because they can offer multiple solutions to an LP's current needs. Private credit still has room to grow, but LPs are becoming more selective and favor managers with experience through credit cycles. Private equity distributions improved somewhat in 2025, but continuation funds can make liquidity headlines look better than underlying cash realizations. Secondaries are increasingly viewed as a normal tool for liquidity, vintage diversification, and relationship building with GPs. Hedge funds continue to face skepticism because much of the market return has come from beta rather than alpha, reducing the appeal of paying performance fees. For newer investors, education is essential because alternatives are complex, less liquid, and require time diversification and pacing discipline.

Data Points: TPA timeline: Almost two decades - Novakovich says TPA has existed for nearly 20 years, originating mainly in Australia/New Zealand and Canada. CalPERS significance: First U.S. pension of size/brand name to adopt TPA - He describes CalPERS as the first major U.S. pension plan to make the shift in a meaningful way. Example TPA benchmark: 70/30 stocks and bonds - Used as an illustration of a broad, outcome-oriented benchmark rather than asset-class-by-asset-class targets. Tactical bond move example: 20% fixed income to zero - A TPA allocator used derivatives to neutralize bond exposure when rates hit zero. Typical tactical SAA band: 15% to 25% private equity around a 20% target - Illustrates how SAA tactical movement usually stays close to a target weight. Short-term opportunity window: 6 to 18 months - Novakovich says TPA can pursue opportunities of this duration that SAA investors often avoid. Private credit target change: Historical target from 0 to 10 - He notes many allocators accelerated into private credit but may not have fully reached target exposure. Continuation funds share of liquidity events: 20% to 25% - He cites PitchBook data suggesting a meaningful share of liquidity events came via continuation funds. Secondary discount on buyout portfolios: 5% to 10% - He estimates this as a fair equilibrium discount for diversified middle-of-the-fairway buyout portfolios. Harvard headline discount: Around 15% - Referenced in discussion of endowments selling private equity stakes on the secondary market. Private equity micro-credential: 7 hours - Kaya offers a seven-hour private equity learning program. Portfolio implementation micro-credential: 9 hours - New Kaya program focused on practical allocation and implementation decisions. Kaya charter / designation: 200+ hours - He notes the charter is a much larger commitment than the short-form micro-credentials. Kaya NXT coupon: 10% off with code MM10 - Mentioned as a special offer for listeners accessing the educational programs. Hedge fund benchmark example: SP 500 up 17%+ - Used to contrast hedge fund returns with strong public equity market performance. Long-only hedge fund outperformance: 200 to 300 bps - He references a Goldman study of hedge fund long-only products outperforming over five-year periods ending in 2024. Long-only hedge fund AUM: $600 billion - Size of the segment cited in the Goldman study. Active management AUM: $28 trillion - Used to illustrate the broader scale of active mutual fund and ETF investing. Private equity fee example: 3 and 30 - He mentions some venture funds still charge this fee structure. Hedge fund industry growth: From a trillion some odd dollars to $4+ trillion, $5 trillion - He describes hedge fund industry asset growth over time.

Pivotal Quotes: "You make a change, and the pain of changing is no longer as great as the pain of staying the same." — Steve Novakovich: Explaining why some institutions, including CalPERS, may finally be willing to adopt TPA after years of underperformance or frustration. "Under the TPA model, all of that gets delegated to the investment team." — Steve Novakovich: Describing the core governance difference between SAA and TPA. "You're not competing against strategies, number one. So what that means is, number two, when you're a GP, really the conversation comes down to what is it that you're looking for?" — Steve Novakovich: Explaining how managers must reposition themselves in a TPA world.

Implications: TPA may accelerate capital shifts toward more flexible, multi-strategy managers and away from rigid bucket-driven mandates. For investors, the message is clear: alternatives require better education, deeper diligence, and closer attention to liquidity, pacing, and portfolio fit.