Building resilient portfolios in today’s volatile world

AS TARIFF negotiations remain unresolved and wars still ongoing, 2025 has been shaped by heightened volatility and increased uncertainties.

In April 2025, the VIX Index, which is a key measure of volatility, hit its highest level since the Covid-19 pandemic.

Since 2022, both equities and bonds indices have also – in a rare occurrence – posted negative returns in tandem more frequently.

Hence, Bank of Singapore expects its new strategic asset allocation framework will be key to help its customers build resilient portfolios to weather this time of heightened volatility.

“In an environment where systemic uncertainty seems to be getting bigger and wider, building a diversified portfolio allows you to be prepared and does not rely on you predicting perfectly,” says Dr Owi S. Ruivivar, chief portfolio strategist at Bank of Singapore.

Unveiled in July, the framework uses an analytical technique that aims to create investment portfolios that can deliver relatively more stable returns while accounting for uncertainties in market conditions.

Ruivivar notes that everyone understands that the concept of uncertainty is inherent to investing. Yet, this is often set aside when building portfolios.

“Instead, portfolios have embedded in them either an explicit or implicit view on expected returns,” she says.

“But those expected returns are an estimate, and portfolio performance is reliant on those forecasts being correct. Oftentimes, such expectations don’t pan out.”

What Bank of Singapore has done, after a year-long study and stress testing of 120,000 portfolios, is quantify the concept of uncertainty and use it as an input into building portfolios, Ruivivar says.

Key enhancements

There are three key differences in the framework that differentiates it from the past, she says.

First, it uses the “robust optimisation” technique, which is typically utilised by quantitative hedge funds and institutional investors.

This is the first time that an Asian private bank has used the robust optimisation technique to design a strategic asset allocation framework, the bank says.

This technique addresses the limitations of two common techniques used by private banks, which are mean-variance optimisation (MVO) and market cap-weighted benchmarks.

Ruivivar notes that Bank of Singapore, like many other private banks, used to use MVO, which works well when market returns fall within reasonable ranges, but typically underperforms when actual market conditions diverge from forecasts.

MVO also often results in concentrated exposures, leading to the industry practice of providing constraints when generating a portfolio.

Meanwhile, the robust optimisation technique does not require such constraints because it naturally leads to greater diversification by having the risk inputs.

Second, the bank ran through many different types of simulations to test the resulting portfolios generated by the robust optimisation technique.

“The industry rarely uses simulation engines, because the techniques involved require quite a lot of research and heavy lifting,” she says.

“It took us about three to four months to arrive at a simulation engine that we thought was a good equilibrium.”

Ruivivar notes that it is a good time to start such portfolio building techniques now that there are tools, data and computational power available. Her team uses a mixture of machine learning and its optimiser to narrow down its robust portfolios.

While these techniques are relatively new in finance, Ruivivar says they have been long-standing techniques in other fields, such as engineering and operations research.

“We’re very data driven – we don’t rely on constraints; we are using our tools in a very thoughtful, deliberate way, and we’re not shying away from it.”

Third, Bank of Singapore is also developing a granular allocation to alternatives that it recommends based on its clients’ objectives in alternatives.

“We’ve distilled why clients want to be in alternatives into three reasons: income, capital accumulation, and a mix of these two ends of the spectrum,” she notes.

“Based on those three different objectives, we suggest a detailed breakdown across different types of private equity, private credit, hedge funds and real estate and infrastructure.”

Ruivivar notes that robust optimisation is not yet suitable for alternative assets, given the lack of suitable public information.

But once the data improves and there is good enough information available, she is open to exploring using the approach in alternatives.

Portfolio thinking

The framework also comes as investors become more sophisticated and seek portfolio-led solutions rather than product-driven offerings, and value expert guidance tailored to their goals, risk appetite, and market outlook.

Ruivivar expects the framework will move the bank towards what she calls “portfolio thinking”, or thinking about investment exposures in a holistic way.

“We don’t want people to just focus on one particular aspect of their portfolio… we want to pivot our clients to thinking more like institutional investors, with a view of the portfolio in its totality, evaluating any one investment by its marginal contribution to overall portfolio risk and return,” she says.

This means that Bank of Singapore wants its clients to embrace a “total portfolio” approach, and seek out factor diversification.

“We do not have one particular factor that is going to be dominating why we make or lose money in the portfolio – it will be much more diversified,” she adds.

Moving forward, the bank’s relationship managers and investment advisers will use the framework to evaluate their client’s portfolios.

These portfolios will comprise two parts: the anchor and the enhancement.

The anchor, of which the framework will be applied to, will be the main portfolio that the client has, and accounts for the lion’s share of their risk exposure.

Breaking down this portfolio, it will comprise four main segments: cash, public markets, gold, and alternatives. The robust optimisation will only be applied to the public markets segment, given the availability of data.

Clients will be advised to keep the cash and gold segments at a level that is consistent with the overall risk of the portfolios, based on standard allocations in the industry.

Meanwhile, the bank will take a qualitative approach on the alternatives segment, by advising clients based on their objectives.

As for the enhancement portfolio, this is an additional trading portfolio for highly idiosyncratic investments or concentrated exposures that a client may be interested in, which may not represent how the bank may recommend allocations.

Ruivivar says this approach informs the discretionary as well as advisory approach – clients will still have the choice to make the final decisions.

“We’ll be fully transparent on what that means in terms of adjusting the kind of risk that they should be prepared to take, and the kind of expected return that they should anticipate.”

Bank of Singapore’s building block approach to SAA construction

Bank of Singapore uses a building block approach to construct portfolios under its new strategic asset allocation (SAA) framework. The portfolio will be split into four main blocks:

• Cash
• Public markets (comprising bonds and equities)
• Gold
• Alternatives

The robust optimisation technique will only be applied to the “public markets” portion of the portfolio. This robust public markets portfolio will also be compared against a baseline portfolio; a market capitalisation portfolio; a standard optimised portfolio; and a standard optimised portfolio with constraints.

Meanwhile, the alternatives portfolio will undergo qualitative construction across key verticals, and be assessed based on the client’s objectives.