Owi Ruivivar: Private Banks «Often Not Aligned With Investor Goals»
Most of the investment approaches in the private banking industry lack focus on risk management and are therefore not in line with client goals, according to Bank of Singapore’s Owi Ruivivar.
When it comes to building portfolios, most private banks adopt one of two approaches. One is based on market capitalization, where the bank attempts to generate alpha on top of a pre-selected benchmark. The other is a mean-variance approach, which is based on maximizing returns for a given level of risk.
According to Owi Ruivivar, Bank of Singapore’s chief portfolio strategist, both of these approaches have significant shortcomings, specifically in the context of private banking and wealth management.
«For private banks, when they build portfolios or what I would call aggregations of investments […] they are often not aligned with investor goals,» Ruivivar remarked at a recent media briefing attended by finews.asia.
Concentration Risk, Forecast-Dependent
For banks that build portfolios based on market capitalization, Ruivivar notes that this effectively results in high concentration risk in the US market without taking into account clients’ risk tolerance. And on the mean-variance approach, it is highly dependent on the precision of forecasting without focusing on the downside in the event of being incorrect.
«When we build portfolios on the institutional side […] investors have a long-term vision about not just growing their wealth, but especially protecting their wealth. One of the things I observed going into private banking is that this portfolio approach is actually not the standard,» said Ruivivar, recalling her previous institutional investment experience at Goldman Sachs Asset Management and GIC.
«The standard in many private banks, especially in Asia, because of regulatory forbearance for the most part, is that these portfolios are more like aggregations or collections of ideas. And oftentimes, they do not have something that is a group that leads to this cohesion of these ideas, trying to generate the best possible risk-adjusted returns.»
New SAA
In response to such issues, Bank of Singapore hired Ruivivar in June 2024 to revamp the bank’s approach to building portfolios with the launch of a new strategic asset allocation (SAA) framework based on the so-called robust optimization technique. This approach utilizes a range of key inputs, such as expected returns and risks, to generate performance with a focus on being defensive in times of crisis.
Ruivivar led a year-long study to stress test 120,000 portfolios and narrow them down to five model portfolios for clients to adopt. They are expected to withstand volatility and cushion the downside across multiple scenarios.
«Uncertainty is the core of all investment decisions. It's nothing new,» she said.
Trade-Off in Robust Optimization
Ruivivar admits that the robust optimization technique is not perfectly suited in all situations and does have a key trade-off in the form of sacrificed returns in exchange for greater resilience. However, she believes that this approach is especially applicable for the current times.
«The early 21st century was really characterized by sort of a ‘Kumbaya' moment, so to speak, in the global economy where you had greater integration, globalization, disinflation – what many economists would call goldilocks,» she explained about an environment that involved strong growth and low inflation.
«In the last five years, we've seen a turnaround in this. We're seeing greater disintegration and multi-polar power dynamics.»
