It adopts a “robust optimisation” technique aimed at creating investment portfolios that can withstand uncertainties in market conditions such as expected returns and risks, thereby delivering stable returns.
The Bank of Singapore, which is the private banking arm of OCBC, says that this is the first time an Asian private bank has used the “robust optimisation” technique to design a strategic asset allocation framework. The framework is typically utilised by quantitative hedge funds and institutional investors, and the technique comes with the analytical rigour required for managing long-term wealth portfolios.
The framework addresses limitations of two common techniques used by private banks: mean-variance optimisation (MVO) and market cap-weighted benchmarks. It promotes greater diversification across asset classes to reduce risks and focuses on minimising the potential loss in the worst-case scenario to reduce the performance gap between expected (best-case) and worst-case scenarios.
Bank of Singapore says that MVO typically underperforms when actual market conditions diverge from forecasts. Meanwhile, portfolios constructed using the market cap-weighted benchmarks approach tend to be heavily concentrated in the US market, which can be less than ideal in today’s environment.
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The new framework is now applied in the design of portfolios across five risk profiles — conservative, moderate, balanced, growth and aggressive.
Shares in OCBC closed 4 cent higher or 0.243% up at $16.48 on July 4.
