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Historically, pension funds managed their portfolios using a strategic asset allocation approach. Fundamentally, this meant buying a mix of asset classes with the highest probability of achieving the necessary returns, at a level of risk that was acceptable – or buying and holding. But since the mid-2000s, some large pension funds have adopted a total portfolio approach strategy, which seeks to maximize returns while keeping a portfolio’s volatility low. A total portfolio approach allows funds to be more dynamic but also involves investing in assets like private credit and infrastructure, which are highly illiquid. For institutional investors, this difference entails a shift in focus from asset class exposures to risk factor exposures, writes Associate Professor Sebastien Betermier in Benefits Canada. Risk budgeting changes the responsibilities of the board and management. Instead of choosing a target asset mix, they set a risk budget that incorporates factors such as market volatility, funded ratio, inflation exposure, and liquidity. For the board, it is a greater responsibility and a more complex task.