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Total Portfolio Approach

Concept 6 of 6

Value added versus the anchor

Value added is what management's choices earned beyond a cheap default portfolio, after every cost, over enough years to tell skill from luck.

Why this matters to you

Choose your view in the header to see why this matters to you and to start at the right level.

In plain words

Value added is the gap between what a fund earned, after every cost, and what a cheap, ready-made mix of shares and bonds would have earned instead. One year of that gap proves little; long records say much more.

Sources: NZ Super Fund, Reference Portfolio page; A. Ang, M. Brandt, D. Denison for the Norwegian Ministry of Finance 2014, p. 22; CPP Investments Insights Institute 2026, p. 4

Picture it

Picture the fund racing its own shadow: a reference portfolio, often called the anchor, of index investments that cost almost nothing to hold. At NZ Super it is notional, kept on paper rather than traded. Management's score is the gap between the fund and the shadow after all costs.

A fund that spreads its bets more widely can trail badly when one corner of the stock market soars. A trade paper summed up CPP's 2026 research: a portfolio that is winning can still look as if it is losing.

Sources: NZ Super Fund, Reference Portfolio page; NZ Super Fund 2026, SPE p. 5; CPP Investments Insights Institute 2026, p. 9; CPP Investments 2026, Relative Performance section; Benefits and Pensions Monitor 2026, headline

Five years against the anchor

Illustrative numbers

A fund is compared each year with its reference portfolio, the anchor. The fund's returns are shown after all costs.

Fund versus reference portfolio, year by year (illustrative)
YearReference portfolioFund after all costsDifference (pp = percentage points)
1+14%+11%−3pp
2−10%−6%+4pp
3+16%+13%−3pp
4+5%+7%+2pp
5+8%+9%+1pp
5 years, annualised6.18%6.58%+0.40pp a year

The fund trailed in the two strongest years, the usual cost of being more diversified than the anchor in a boom, yet added about 0.4 percentage points a year over five years: roughly €40m a year on €10bn. Judged on year 1 or year 3 alone, management would have looked like a failure.

How funds do it

Where a fund uses a reference portfolio, the board chooses and owns it in advance, while management owns every departure from it and answers for the gap after all costs. At NZ Super the board sets the reference portfolio and the investment limits, and management runs the fund against them.

  • NZ Super reports the gap over one to twenty years and since inception. In the year to June 2026 it trailed slightly, 14.17% vs 14.27% (as of 30 Jun 2026 · source), but over twenty years the fund and its anchor returned 9.68% vs 8.19% a year (as of 30 Jun 2026 · source), leaving the fund about NZ$22bn (as of 30 Jun 2026 · source) better off. Its long-term return expectation, which includes 0.9% a year (as of 1 Jul 2026 · source) of value added, is one to beat, not a target.
  • In the year to March 2026 CPP Investments and its Benchmark Portfolios returned 7.8% vs 13.2% (as of 31 Mar 2026 · source). CPP cites a rally concentrated in AI-linked US technology and communication stocks that its deliberately less concentrated fund did not match. Over ten years it remains 0.7% a year (as of 31 Mar 2026 · source) ahead after costs.
  • CalPERS shows that the anchor is itself a choice. In its board education, the fund's public-equity position measured +7 vs −27 percentage points (as of Jan 2025 · reported · source): an overweight against the old policy portfolio, a large underweight against a simple equity-and-cash mix (reported). From July 2026 a single 75/25 (as of 17 Nov 2025 · source) reference portfolio replaces its asset-class benchmarks.

Sources: NZ Super Fund 2026, SPE p. 6; NZ Super Fund, Reference Portfolio page; Wilshire 2026, p. 2; NZ Super Fund 2026, SOI pp. 10–11; NZ Super Fund, FY2026 release; NZ Super Fund, Long-term expectation page; CPP Investments 2026, Relative Performance section; CPP Investments 2026, pp. 34, 53; CalPERS Board 2025, slide 11; CalPERS 2025, memo p. 2; slide 5

Expert view and evidence

Formally, value added is the fund's return after all costs minus the anchor's return. Ang, Brandt and Denison's 2014 review for Norway explains why this is clean: an index anchor costs almost nothing to hold, so the gap measures active management. Against appraisal-based private-market indices, which nobody can buy, it does not. Anchors are also notional: NZ Super's assumes costs of 0.20% (as of 1 Jul 2026 · source).

Noise is the central problem. In CPP's stylised model, a diversified design expected to add value has a 29.8% (as of Jul 2026 · source)1 chance of trailing its benchmark over ten years, a false negative, against 6.5% (as of Jul 2026 · source)2 for one that stays close to it. These are model probabilities, not a backtest; CPP calls neither design inherently better. So CPP scores separate decisions (risk level, exposure design, selection), and the CFA Research Foundation review recommends comparing a fund with the best feasible alternative under the same constraints, judged on what was known then.

Across funds, evidence is weak. A peer study by the Thinking Ahead Institute (part of WTW, which sells TPA advice) and the Future Fund put total portfolio approach (TPA) adopters 1.3% a year (as of 2025 (study 2024) · source)3 ahead of peers using strategic asset allocation (SAA), yet its authors flag data issues, call the test crude and credit much of the gap to private assets. CalPERS plans on about 60bp a year (as of Nov 2025 · source)4. No controlled study shows TPA beats a traditional SAA, and the CFA Research Foundation review (2026) finds the literature does not establish systematic outperformance.

Sources: A. Ang, M. Brandt, D. Denison for the Norwegian Ministry of Finance 2014, pp. 21–22, 100–101; NZ Super Fund 2026, SPE p. 5; CPP Investments Insights Institute 2026, pp. 4, 6, 12; CFA Institute Research Foundation 2026, pp. 38–39; Thinking Ahead Institute & Future Fund 2025, closing report pp. 19–20; Thinking Ahead Institute 2025, pp. 11–12; CalPERS 2025, transcript pp. 46, 51

Notes on the numbers

  1. 29.8%, CPP's stylised model: probability that a low-correlation design (61%, 880bp tracking error) expected to add 1% a year trails its benchmark over ten years: A stylised probability from a model in CPP's own paper, not a backtest of real results.
  2. 6.5%, CPP's stylised model: probability that a high-correlation design (97%, 230bp tracking error) expected to add 0.9% a year trails its benchmark over ten years: A stylised probability from a model in CPP's own paper, not a backtest of real results.
  3. 1.3% a year, Thinking Ahead Institute peer study: ten-year return gap between the funds it grouped as TPA and as SAA: From one peer study in which funds classified themselves, reported by its authors "with data issues" and called a crude test; they credit much of the gap to private-asset allocations. First reported in the press as 1.8% a year. Not a controlled comparison.
  4. about 60bp a year, CalPERS planning assumption for value added over its reference portfolio: about 300bp of active risk at an information ratio of 0.2: A planning assumption, not a measured result.

Common misunderstandings

“A year behind the benchmark means the managers have failed.”

In fact:

Not on its own. In the year to March 2026 CPP Investments returned 7.8% vs 13.2% (as of 31 Mar 2026 · source) against its benchmarks, yet over ten years it was 0.7% a year (as of 31 Mar 2026 · source) ahead after costs. Short windows are dominated by noise and by whatever happened to lead the market.

Sources: CPP Investments 2026, Relative Performance section; CPP Investments 2026, p. 53; CPP Investments Insights Institute 2026, pp. 3–4

“Value added is free money.”

In fact:

It is bought with active risk, and the fund can fall further than its anchor. NZ Super estimates that a repeat of the global financial crisis would cut the fund and its reference portfolio by 52.6% vs 44.7% (as of Sep 2026 · source) from peak to trough.

Sources: NZ Super Fund, Risk & volatility page

“The peer study showing TPA funds 1.3% a year (as of 2025 (study 2024) · source)1 ahead proves the approach adds value.”

In fact:

It is one study of self-classified funds, which its authors call crude and flag for data issues, and much of the gap reflects private-asset allocations. No controlled study shows TPA beating SAA.

Sources: Thinking Ahead Institute & Future Fund 2025, closing report pp. 19–20; CFA Institute Research Foundation 2026, p. 39

Notes on the numbers

  1. 1.3% a year, Thinking Ahead Institute peer study: ten-year return gap between the funds it grouped as TPA and as SAA: From one peer study in which funds classified themselves, reported by its authors "with data issues" and called a crude test; they credit much of the gap to private-asset allocations. First reported in the press as 1.8% a year. Not a controlled comparison.

“Any sensible benchmark will do.”

In fact:

The anchor decides what counts as an active bet. At CalPERS the same public-equity position measured +7 vs −27 percentage points (as of Jan 2025 · reported · source) depending on the yardstick, so choosing the anchor is a governance decision in its own right.

Sources: CalPERS Board 2025, slide 11; CFA Institute Research Foundation 2026, p. 8

Check yourself

In the year to March 2026 CPP Investments and its Benchmark Portfolios returned 7.8% vs 13.2% (as of 31 Mar 2026 · source), yet over ten years the fund added 0.7% a year (as of 31 Mar 2026 · source) after costs. What should its board conclude?

Related

Sources

  1. Total Portfolio Approach: A Critical Literature Review. CFA Institute Research Foundation (R. Elkamhi and J.S.H. Lee), 2026.
  2. The TPA Journey. Thinking Ahead Institute, 2025.
  3. Review of the Active Management of the Norwegian Government Pension Fund Global. A. Ang, M. Brandt, D. Denison for the Norwegian Ministry of Finance, 2014.
  4. Global Asset Owner Peer Study on Best Practices (2024). Thinking Ahead Institute & Future Fund, 2025.
  5. Study gives evidence of value-add from TPA over SAA. Top1000funds, 2024.
  6. Measuring What Matters: Evaluating the Total Portfolio Approach. CPP Investments Insights Institute (S. Shen, D. Walker, G. Rubin), 2026.
  7. CPP Investments net assets total $793.3 billion at 2026 fiscal year-end. CPP Investments (news release), 2026.
  8. Annual Report 2026 (fiscal year to 31 March 2026). CPP Investments, 2026.
  9. A winning portfolio can still look like a loser, CPP Investments warns. Benefits and Pensions Monitor, 2026.
  10. Reference Portfolio. NZ Super Fund (Guardians), web page.
  11. Statement of Performance Expectations 2026/27. NZ Super Fund, 2026.
  12. ALM: First Reading of PERF Recommendations (staff deck). CalPERS (S. Gilmore, M. Nix, S. Terando), 2025.
  13. Board Education Day: TPA and transition considerations. CalPERS Board, 2025.
  14. Total Fund Policy Review: First Reading (Wilshire memo). Wilshire (T. Toth), 2026.
  15. Investment Committee transcript (TPA adoption meeting). CalPERS, 2025.
  16. ALM: Reference Portfolio Design and Active Risk Limits. CalPERS, 2025.