This article first appeared in Wealth, The Edge Malaysia Weekly on August 28, 2023 - September 3, 2023
Under the leadership of its CEO Carolina Minio Paluello, Arabesque AI aims to democratise private mandates offered by private bankers to their clients by leveraging artificial intelligence (AI).
“From our conversations, they (private bankers) are probably able to reduce the cost (of private mandates with our solutions) by at least 30% to 50%,” she says.
A significant cost reduction means private banking can offer private mandates to more individuals by lowering the minimum investment amount and, perhaps, fees and charges, as well.
Private mandates are a tailor-made wealth management solution that cater to the specific needs of an individual, typically high-net-worth individuals with several millions in assets locally. Their money can be invested in one or various asset classes with different strategies, based on specific preferences.
However, private mandates do not come cheap as they involve constructing and monitoring portfolios, executing trades, regular reporting and more, which explains why there is a high minimum investment amount.
Leveraging technology such as AI and big data to lower the operational cost of asset and wealth management with regards to private mandates is where Arabesque AI comes in.
At Arabesque AI, private banking can help their customers build an investment portfolio with a targeted ESG (environmental, social and governance) rating and assess the overall ESG performance of their portfolio, Minio Paluello tells Wealth in an interview.
During her visit in July, Minio Paluello met with five banks in Malaysia and Singapore and is looking forward to providing them with Arabesque AI’s solution. However, its solution is currently limited mainly to equities.
Before joining Arabesque AI, Minio Paluello served at several top-tier asset management firms, mainly in charge of sales and marketing activities.
Until July last year, she was the global management committee member and global head of products, marketing, solutions and quant for Schroders. The London-based firm manages public and private markets investment for clients with assets under management (AUM) of US$887.2 billion as at Dec 31, 2022, according to its official website.
About three years before that, Minio Paluello was limited partner, global head of sales and solutions and deputy chief investment officer at Lombard Odier Investment Managers. Headquartered in Switzerland, the firm had AUM of US$71 billion as at May 31, 2023.
She has frequently been asked why she decided to quit her jobs at big and reputable asset management firms.
“The reason I came out of the tier-one asset management world is because I could feel these new demands coming from the next-generation investors [that some firms could be struggling to meet].
“It is increasingly important that asset management firms cater to these emerging demands by not being restricted by their technological capability,” she says.
Catering to new and emerging demands
What are these demands? Minio Paluello draws insights from the PwC report, “Asset and Wealth Management Revolution 2023: The New Context”. Published on July 7, the report is based on surveys with 250 asset managers and 250 institutional investors globally.
The report notes that about US$68 trillion of wealth will be transferred from baby boomers to the next generation — the millennials — by 2030. And they are increasingly asking for highly personalised services and ESG assessment through better technology solutions.
Minio Paluello herself observes a change in demand coming from the younger-generation investors that is different from their parents’.
“They start saying: ‘Well, very good, the performance is fine. But what is its impact on climate? How is it doing on gender diversity?’ The bankers are starting to see that the next generation wants different offers. If they don’t want to lose their clients, they need to upgrade their offerings,” she says. And the answer lies in technology.
The minimum investment amount of private mandates has not dropped much in many countries over the years and caters mainly to high-net-worth investors. For the global players, the minimum amount is typically US$5 million with an annual management fee of 1% or lower, says Minio Paluello.
She says similar private mandates offered to institutional investors with an AUM of US$50 million or more come with an annual management fee of only 0.2%. The difference in the fees is due to economies of scale.
Independent digital platform for ESG targeting
Minio Paluello says traditional banks and large asset and wealth management firms find it challenging to reduce costs as they operate with legacy systems and equipment, whereas Arabesque AI developed its system from scratch under the leadership of founder Omar Selim.
“Our platform is built by the younger generation. They didn’t use the legacy system … they built a new one where everything is on the cloud and AI-powered,” Minio Paluello says.
There are about 100 parameters, including many ESG-related ones, that private bankers can offer their clients to customise their own investment portfolio to invest in a basket of individual stocks.
“You can select the country, sector and exclusion based on shariah principles with our solution. You can set your benchmark, your targeted income and even the non-financial preferences.
“For instance, what is the ESG score that you like? What is the carbon emission level that you want? How many companies do you want to be aligned with [in terms of] climate, gender diversity and inclusion goals? We take them into the impact space. And we can do it for every client, separately.
“We can construct portfolios [based on a client’s preference] within minutes at a very small cost. And when we are told that the client wants to make changes, we can change his portfolio,” she says.
The Arabesque AI platform allows its users to incorporate data from any provider, such as Morningstar Sustainalytics or MSCI, based on their preference.
Just how comprehensive can the ESG data provided by Arabesque AI be? Minio Paluello says there is certainly a limit, especially when it comes to emerging markets. But the firm’s platform will help investors better assess the ESG performance of a long list of companies and pressure more companies to disclose ESG-related data.
Banks that have just started their journey with Arabesque AI will have to work closely with her team, and they will take some time to familiarise themselves with the new system.
“At the beginning stage, the system can be a bit complicated to the new adopters. If you have too many preferences [for a customised portfolio or index], you won’t find a solution. So, at the beginning, we will tell them to talk to our solution team if there’s any problem. And we help them design the portfolios.
“But as they become more familiar with it and get better, they will become more independent. And we will be adding more features to it,” she says.
Feedback from industry players
Shawn Kong, senior director in charge of institution, corporate and high-net-worth individual (HNWI) business at AHAM Capital, says private mandates are provided for private banking clients.
The threshold for a person to qualify as a private banking client varies, he adds. “The threshold can vary across different organisations and jurisdictions, with requirements often being more stringent in regional private banks.
“For our private wealth segment, we typically engage with clients with assets that fall within the range of RM3 million to RM5 million and above, depending on the types of mandates offered,” he says.
Kong explains that there are generally two types of private mandate services. The first is discretionary service, which is a private mandate managed by a particular team of portfolio managers of investment professionals with a pre-agreed mandate (or parameters) that encompasses asset classes, regions of investment, base currencies and other specific requirements, including shariah or ethical considerations.
“Clients will have full access to reports, transactions and portfolio manager activities with periodic review occurring quarterly or semi-annually. This service is especially suitable for clients who lack the time to closely monitor markets and make investment decisions themselves.
“At AHAM Capital, clients may have multiple discretionary private mandates, each expressing distinct strategies that tap into the expertise of the investment managers. The flexibility empowers clients to tailor their investment approach according to their unique financial objectives and preferences.”
The second type is non-discretionary private mandates, which are for clients who prefer a more hands-on approach and active involvement in decision-making. “This service empowers clients to express their views and make investment decisions through collaborative engagement with wealth managers such as ourselves.
“At AHAM Capital, we provide clients with access to a diverse range of investment ideas, spanning direct securities such as bonds and equities to structured products and alternative investments, including private equity and private REITs (real estate investment trusts). Additionally, clients can explore various portfolios of funds tailored to their specific preferences and financial goals.”
Other services that could be offered through private mandate are multi-currency investment accounts, foreign exchange hedging solutions and portfolio lending that allows clients to borrow money by using their investment portfolio as collateral.
Private mandates could be a profitable segment for banks and asset management firms. AHAM Capital has seen its private mandate business — inclusive of high-net-worth individuals (HNWIs) and institutional clients — grow exponentially over the years.
“The total assets under administration (AUA) of the private mandate segment [of AHAM Capital] grew 80% from RM15 billion at the start of 2018 to over RM27 billion as at June 30 this year.
“This is in tandem with the overall growth of the company, which has seen its AUA surge 66% to RM80 billion as of June 30 this year from RM48 billion in 2018,” says Kong.
Another private banker in a foreign bank who declines to be named says private mandates could require a minimum investment amount of US$20 million to US$30 million for foreign banks in Malaysia and RM1 million to RM5 million for local banks.
The high investment amount could come with a higher level of personalisation, he adds, as the cost of customising an investment portfolio based on one’s specific needs and preferences is high.
“You can access private mandates with a lower amount, but you might not have much flexibility. You might not be able to invest in specific asset classes, for instance. Everything comes with a cost.”
Liew Ooi Hann (better known as Hann Liew), CEO of Halogen Capital, the first digital asset fund management firm in Malaysia, agrees that AI could play a meaningful role in making private mandates more accessible to investors, especially on ESG targeting.
“Legally speaking, there shouldn’t be anything to stop a licensed fund manager from raising, let’s say, RM50,000 or RM100,00, from an investor and managing the money [in the form of a private mandate]. The main thing that’s stopping it is the manual processes they have to go through, including the legal agreement and other paperwork, which can be quite costly.
“The minimum investment requirement of several million is more of a legacy thing [restricted by existing infrastructure and manual processes of the banks and asset management firms]. It just happens that most firms haven’t automated their processes yet as their business remains profitable,” he says.
Liew sees real value in ESG targeting enabled by technology, which means enabling an individual client to structure a portfolio with an overall ESG rating in line with his or her preference.
“Assuming you have a targeted ESG rating as a private client. The challenging part is on the opposite side (which is the fund manager). How are they supposed to make sure you hit your investment returns, given a specific level of risk, and yet also hit the ESG rating target? What if the investment returns are met, but the ESG rating isn’t?
“So, there’s some matching work to be done. And obviously, it would be much easier if you have some sort of AI capability, algorithm or machine learning there for help,” he says.
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