Strategic asset allocation (SAA) has long provided the structural foundation for long-term investing. It offers a framework for setting expectations, managing risk, and staying invested through cycles. But like all frameworks, it must evolve as conditions change.
Recent years have brought greater uncertainty to macroeconomic policy, interest rate regimes, and asset class behaviour. Correlations have become less stable, and the assumptions that underpinned many traditional portfolios –particularly those built on historical averages –have become less reliable.
In response, we have redesigned Bank of Singapore’s SAA framework.
The revised approach reflects the need to anchor portfolios in resilience, not just precision. At its core is a shift from traditional mean-variance optimisation to RO – a more realistic method of portfolio construction that accounts for uncertainty in capital market assumptions and seeks solutions that hold up across a range of plausible futures.
This paper outlines the thinking behind the new SAA and explains how it is better positioned to serve investor objectives in a more uncertain world.
Why strategic allocations must evolve
Most allocation frameworks continue to rely on some form of mean-variance optimisation (MVO), a method that assumes we can forecast expected returns, volatilities, and correlations with confidence. In practice, these inputs are difficult to estimate with precision–and are subject to change over time.
MVO is mathematically sensitive. A small adjustment to one return assumption can produce large shifts in recommended allocations. These shifts are not necessarily intuitive and often introduce instability into portfolios that are meant to be strategic anchors.
In a world where the future is difficult to forecast, building portfolios that depend heavily on precise inputs can be counterproductive. We believe that strategic asset allocation should be robust to uncertainty, not just optimised for a single view.
The case for Robust Optimisation
RO starts with the acknowledgement that markets are noisy and that long-term estimates are inherently uncertain. Rather than optimise around a single expected return for each asset, RO considers a range of possible outcomes, then searches for portfolios that perform reasonably well across that range.
This leads to portfolios that are:
Importantly, RO does not assume that uncertainty is a flaw to be corrected. It accepts it as a structural feature of investing – and incorporates it explicitly into the design process.
Our design process
Our new SAA framework follows a structured, five-stage process that integrates robust portfolio design with forward-looking evaluation.
We start with ten public market asset classes across fixed income and equities. These include US Treasuries, TIPS, investment grade and high yield developed market credit, emerging market USD-denominated debt, and equities across the US, Europe, Japan, and Asia ex-Japan.
For each asset class, we estimate long-term return and volatility using a building block approach. Crucially, we also define a confidence range for each return estimate to reflect the uncertainty inherent in forecasting. These ranges form the basis for RO.
RO identifies portfolios that perform well across many input combinations, rather than just the one that looks best under a central scenario. The result is a set of candidate portfolios that are more resilient to model error and estimation risk.
Candidate portfolios are then evaluated across a wide set of macroeconomic regimes and market environments, both historical and simulated. We assess performance not only on average, but also on how portfolios behave under stress.
Final portfolios are selected for each portfolio risk profile based on consistency, downside resilience, and alignment with investor objectives.
A more intentional equity allocation
Many investors access global equities through market-cap-weighted indices. These are often labelled as global but are in practice dominated by US exposure – and increasingly concentrated in a narrow set of large-cap technology stocks.
This approach may work when US equities outperform, but it leaves portfolios vulnerable to valuation risk, policy shifts, and factor concentration. It also under-represents other geographies that may offer diversification and return potential over time.
Our SAA takes a regionally diversified approach to equities. RO portfolios deliberately allocate across US, Europe, Japan, and Asia ex-Japan–recognising that different markets are exposed to different economic drivers, valuation regimes, and policy dynamics.
This more intentional structure reduces reliance on a single macro narrative or sector dynamic and helps avoid the performance drag that can arise when yesterday’s winners revert to the mean.
Completing the portfolio: Cash, gold, and alternatives
Once the public markets core is in place, we complete the strategic portfolio with cash, gold, and alternatives.
Alternative allocations are calibrated to each risk profile and liquidity tolerance
Implications for clients
Clients don’t experience markets through averages – they live through sequences of events, many of which are unexpected. Portfolios designed around a narrow set of assumptions may perform well in good times but are more likely to struggle under stress.
The new SAA is designed to mitigate this problem. It aims to:
Conclusion
Strategic asset allocation boils down to a design choice, based on the investment environment. Our new framework reflects this understanding. By incorporating uncertainty directly into the construction process, we aim to deliver portfolios that are more resilient, more aligned with client objectives, and better suited to the investment challenges ahead.
This is not about complexity for its own sake. It is about building in the right level of robustness – so that portfolios can stay on course, even when the path is not what we expected.
Important information
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Disclaimer
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