Tapping AI to ‘hyper-customise’ portfolios

FUND and wealth managers may be relatively late adopters of technology, but tech firm Arabesque AI is determined to disrupt the status quo.

Its offering is packaged as “portfolio management as a service’’, akin to a software as a service (SaaS) solution, and is able to “hyper-customise’’ single-stock portfolios at scale.

For wealth managers, the platform enables them to offer discretionary portfolio management (DPM) services at a much lower initial investment of US$200,000 to US$250,000, instead of the typical ticket size of US$1 million.

Banks look to DPM services as an avenue for a recurring fee income. Larger portfolios are preferred as a larger investment amount enables diversification, particularly for clients who want to invest in bonds.

DPM penetration for most banks is relatively low at less than 10 per cent. A lower initial threshold would enlarge private banks’ potential market and enable high-net-worth clients to dip their toes in.

Dr Carolina Minio Paluello, Arabesque AI chief executive, believes the firm’s data-driven offering will give wealth managers an edge, not just in alpha generation, but also in the ability to build bespoke portfolios for clients who want sustainability and impact.

The customisation is made possible by the firm’s AI-powered platform, which works on the cloud and is able to crunch massive amounts of data to make stock predictions. A quant solutions team will work with managers to help construct “benchmark-aware’’ portfolios, for instance. For clients seeking sustainability, stocks can be chosen based on desired environmental, social and governance (ESG) characteristics, such as exclusions, ESG integration and impact, according to client objectives.

To date, the firm is understood to have signed up five banks/wealth managers, three of whom have Asian businesses. Dr Paluello said: “Wealth managers see our service as an opportunity to prepare and better serve the next generation, and become more efficient. Our real story is that we transform the way the wealth managers serve and engage with their clients.

“Wealth managers need this technology to capture the growing demand of the next generation. They need it to build customised portfolios, incorporating clients’ sustainable and impact preferences.’’

Fund veteran Gerard Lee has been roped in as Arabesque Singapore chairman. He was former chief executive of Lion Global Investors, and was to have retired earlier this year.

HSBC is an early client. It recently launched the HSBC ESG Risk Improvers Index, in partnership with Arabesque AI, powered by data from ESG Book. The index is understood to be a first for HSBC in the use of AI to measure the improvement of companies’ ESG credentials.

Both Arabesque AI and ESG Book were incubated by the Arabesque Group, set up in 2013 following a management buyout from Barclays Bank.

ESG Book collects raw data on over 30,000 companies and assesses companies’ sustainability performance across different dimensions. It is available on Bloomberg terminals. ESG Book last year raised US$35 million in Series B funding. Its clients include Allianz, BNY Mellon and Citi.

Arabesque AI uses “deep’’ machine learning, which is adaptive and takes a model-based approach. Its platform dynamically calculates stocks’ expected returns with no assumptions on the underlying data. Series A funds were provided by asset manager DWS in 2019; it has begun efforts to raise series B funding.

Dr Paluello said that Arabesque’s AI models are able to predict the daily prices of more than 25,000 stocks over a month. “The AI model looks at more than 100 company features to make stock predictions, including value, momentum, size, risk, quality, analyst sentiment, market indices and ESG characteristics. The AI models are more adaptive and able to capture changes in the market.’’

Arabesque AI positions itself as a marketplace for ESG data, and ESG Book is one of the data providers. Dr Paluello believes the service is in the right place at the right time, as scions of private bank clients increasingly want their investments to be sustainable and wield impact.

“Wealth managers are looking to develop more impact portfolios to capture growing demand of the next generation that desires more than performance. They are looking for portfolios that can help solve some of today’s challenges…

“We look at the actual impact a company has on society, people and the plant. To assess that, we need specific data on revenues of companies. We classify this in categories and map it to themes, including the (UN) Sustainable Development Goals.’’

Arabesque AI’s service is also directed at asset owners, including insurance companies and pension funds, with whom discussions are making “good progress’’. Dr Paluello said that the platform can help asset owners “be better stewards of their capital and be in control of the net-zero pledge most have committed to’’. She added that the technology enables the analysis of internally and externally managed portfolios, across a common sustainability framework.