Beyond Asset Allocation: Sunday Start | What‘s Next in Global Macro

Research evidence excerpt

Beyond Asset Allocation: Sunday Start | What‘s Next in Global Macro

Global Idea

July 26, 2026 07:35 AM GMT

Morgan Stanley & Co. LLCMSunday Start | What's Next in Global Macro Vishwanath Tirupattur

Strategist

Beyond Asset Allocation Vishwanath.Tirupattur@morganstanley.comMorgan Stanley & Co. International plc+ +1 212 761-1043

Stephan M Kessler

Quantitative Analyst

Stephan.Kessler@morganstanley.com +44 20 7425-2854

In this week's Sunday Start, we turn to a topic we have not often explored in these

pages: the analytical foundations of asset allocation and portfolio construction. We

argue that the Total Portfolio Approach (TPA) represents an important evolution

beyond the traditional Strategic Asset Allocation (SAA) framework that has long

guided institutional investors. We begin by examining the key limitations of SAA,

then outline the core principles of TPA and consider the lessons it offers for

portfolio construction in an increasingly uncertain investment environment.

For decades, SAA has provided a disciplined, benchmark-driven framework for

balancing risk and return across asset classes. Yet its strengths are also the source

of its limitations, particularly for investors with long investment horizons. Built on

long-term assumptions about expected returns, risks, and correlations, SAA

optimization models often produce portfolios that are static and slow to adapt to

changing market conditions. Forecast errors can persist for years, while cross-asset

correlations tend to change dramatically during periods of market stress,

undermining diversification precisely when it is needed most. As a result, portfolios

that appear well diversified across asset classes can become highly concentrated in

their underlying sources of risk.