A New Framework for Total Portfolio Management

Meeting Cash Flows while Compounding Wealth through Curiosity, Growth and Protection

Today, I'm excited to share the early stages of a new asset allocation framework I'm in the process of developing. While it's still a work in progress, the concept could bring a refreshing twist to traditional methods.

Traditional asset allocation often starts with defined asset classes or risk factors and uses linear assumptions to predict returns and risks. Capital is then allocated to Managers or Securities, often with the expectation of outperforming a benchmark.

This assembly line approach makes it easy for the investment industry to function, and it's served me well as a portfolio manager. I’ve also been fortunate to have participated and contributed to incremental innovations to this approach - from asset-liability matching to optimizing alpha and beta separately, and using quantitative and risk-factors to better understand underlying asset behavior across public, private and alternative investments.

Despite the sophistication of these techniques, we seldom revisit the basic principles underlying these advanced strategies. It's similar to how the internet has evolved; foundational 1980s protocols like TCP/IP support today's complex apps and AI technologies without much thought about their basic layer.

I’ve been thinking a lot about the foundational framework for asset allocation and propose a different perspective, structured around four key components: Cash Flow, Protection, Growth, and Curiosity.

While the words may be common, I use them in a slightly different context.

Cash Flow : The first goal of any portfolio should be to meet future cash needs. This usually ties back to income-generating assets, but we should also consider liquidity. For illiquid assets, this might mean focusing on interest or distributions, while for liquid assets, it involves ensuring capital is accessible when needed.

Protection : This aspect covers both economic and behavioral protections. It includes traditional strategies like buying bonds or tail hedging, as well as implementing risk budgets and governance structures to match an investor’s utility function, loss aversion and make the most efficient use of risk capacity.

Growth : This component remains rooted in traditional strategies—think equities or credit—aimed at aligning with or outperforming standard market benchmarks like the S&P 500. The objective here is to secure returns that exceed inflation, using a diversified portfolio of risk premiums, sourced from public, private and alternative sources. However, exposures would need to be balanced and optimized in combination with Cash Flow and Protection.

Curiosity & Imagination : The most exciting potential for gain lies in human creativity and how different seemingly unrelated factors converge and reinforce each other, propelling the innovation flywheel into high gear. The returns to curiosity and imagination are superlinear. While traditional asset allocation might suggest that investing in venture capital is enough to cover this "curiosity allocation," I contend that the reality is far more complex. Due to the nature of power law dynamics, merely distributing investments across various venture funds, which in turn invest in a series of companies, typically yields more predictable, linear returns. Instead, I believe the curiosity & imagination should be about taking well thought out superlinear positions, whether its in public markets (e.g. Apple, Tesla) or through ventures through venture investments that fully leverage the unpredictability of power law dynamics (this is still a concept I'm refining, and I welcome any thoughts on it). These investments shouldn't be treated as routine checks; they can't just be slotted into any standard position. Rather, they should be approached like deep, out-of-the-money call options, where the potential returns are evaluated over many years, possibly even decades.

A seasoned wealth manager and good friend recently remarked that although he finds my ideas compelling, he's unclear on how to implement them in practical terms—whether there’s a specific fund to invest in or a tool to help build such a portfolio for his clients. Indeed, translating these concepts into actionable strategies is a challenge left for another day my friend. Today, I simply aim to spark conversation and invite feedback on this innovative approach.

This framework isn’t entirely original. It’s the result of multiple conversations with good friends like Dominic Garcia and leading thought leaders in both the allocator community as well as research teams at public and private asset managers. It draws inspiration from pioneers like Ashvin Chhabra with his ‘Aspirational Investor’ Framework, Liability Investing guru Mike Peskin and strategist and System 2 thinker Michael Mauboussin, amongst many others.

This blog post serves as an invitation to explore and refine these ideas further—your insights are invaluable as we consider how this framework might better serve fiduciaries and investors alike.