Total Portfolio Approach for Pension Funds
By: Ortec Finance
This latest report from Ortec Finance on Total Portfolio Approach (TPA) uses a factor lens analysis to assess the risk and return exposures of the top 30 pension funds by AUM across five of the world's largest pension systems. Instead of relying on the traditional asset allocation lens, our comparative analysis focuses on quantifying factor exposures to macro drivers such as Equity, Real Rates, Credit, Inflation, and Other – where Other captures Alternative asset classes that are typically uncorrelated with Equity.
This is an excerpt from NCPERS Summer 2025 issue of PERSist.
This report applies a Total Portfolio Approach (TPA) by using a factor lens analysis to assess risk and return exposures among pension funds within and across five of the largest pension systems worldwide: Canada, The Netherlands, Switzerland, the U.K., and the U.S. Rather than utilizing a traditional asset allocation lens for assessing risk and return exposures, this study conducts a comparative analysis of the top 30 pension funds by assets under management by quantifying their factor exposure to the following macro drivers: Equity Factor, Real Rates, Credit, Inflation, and Other. The benefit of applying a factor lens approach provides an additional perspective to understand risk and return exposures. The risk and return values used in this analysis are based on calculations in the proprietary Ortec Finance Asset-Liability Management (ALM) software GLASS and the Ortec Finance Scenario Set.
Key findings
The traditional asset allocation lens shows that pension funds have, on average, the highest allocation to Fixed Income assets, apart from the U.S. which has the highest allocation to Public Equity. A factor lens shows all five pension markets face the highest allocation to Equity Factor.
Equity Factor is the largest driver of total risk and return in each of the five markets. However, Real Rates and Inflation provide the most efficiency given their return for the cost of risk. The biggest driver of total risk and total return in all markets is the Equity Factor, contributing roughly 40% to 60% of total return and 55% to 70% of total risk.
Through a factor lens approach, the top 30 funds within each market face relatively similar decomposition to return and risk, except the U.K. where there is more dispersion across the funds as more than one-third of funds face a higher exposure to Credit and Inflation than Equity. The factor risk exposure in Canada, Switzerland, the Netherlands, and the U.S. is relatively homogenous amongst the top 30 funds where Equity Factor is the top return and risk driver. In the U.K. more than one-third of the 30 top pension funds have a higher factor return and risk exposure to Credit and Inflation than to Equity Factor.
The difference across the five pension markets can be explained by local regulations and the set-up of the funds. Liabilities discounted by long-term expected return on assets (U.S.) public plans or discounted by the risk-free rate (NL) have a massive impact on which factor exposures are the best fit.
Methodology
Our analysis is based upon publicly available data, including investment policy statements and annual reports, from the top 30 largest pension funds in Canada, The Netherlands, Switzerland, the U.K., and the U.S. All country-level results are presented as the average across the 30 funds for that region and all risk (standard deviation of return) and return figures are presented as the expected results over the next three years Liabilities are not considered in this analysis.
Factor analysis is an alternative assessment method which approaches exposure from identifying underlying macro risk rather than from each individual asset. The aim of factor lens is to explore the variations between complex correlated variables and decompose risk to understand the behavior of commonly unobserved variables.
To implement a factor lens analysis, we qualitatively map assets across Public Equity, Fixed Income, Real Estate, and Alternatives to five factors – Equity Factor, Real Rates, Inflation, Credit and Other – where Other captures Alternative asset classes that are typically uncorrelated with Equity. Our analysis portrays the breadth of exposure to these five factors in our ALM software GLASS. Using the Ortec Finance Economic Scenario Generator, we map the factor allocation and calculate the factor risk and return of each pension fund in our analysis.
The Ortec Finance Economic Scenario Generator integrates short and long investment horizons consistently across all asset classes and economies. Instead of the traditional complex, and inconsistent mix of models, a wide range of investment and risk management applications are now served with one model.
The advantage of using one integrated and consistent methodology is that it provides realistic stochastic risk and return scenarios for all relevant time horizons and balance-sheet-level applications in one application, bringing consistency and efficiency to enterprise-wide investment decision-making and risk management processes.
The proprietary frequency domain methodology of our Economic Scenario Generator, combined with dynamic factor models, has been developed specifically to capture the complex realities of financial and economic markets for all horizons and asset classes at any point in time.
For more, we invite you to read the complete report from Ortec Finance.
About Ortec Finance: Ortec Finance is the leading provider of technology and solutions for risk and return management. We model and map the relevant uncertainties to help institutional investors monitor their goals and decisions. We design, build, and deliver high-quality software models for asset-liability management, risk management, impact investment, portfolio construction, performance measurement & attribution, and financial planning.
Ortec Finance's strength lies in an effective combination of advanced models, innovative technology, and in- depth market knowledge. This combination of skills and expertise supports investment professionals in achieving a better risk-return ratio and thus better results.
Founded in the Netherlands, Ortec Finance has eight global offices in Amsterdam, Rotterdam, London, Zurich, Melbourne, Singapore, Toronto, and New York.