This article first appeared in The Edge Malaysia Weekly on May 6, 2024 - May 12, 2024

ARTIFICIAL intelligence (AI) is set to be the next frontier in the fund management industry, with the aim of offering better returns to investors. London-based Arabesque Holdings sees the power of AI continuing to evolve as the financial investment process undergoes radical change.

The group supplies AI-powered data to global fund houses to help with better investment decisions. In an interview with The Edge, its founder and CEO Omar Selim points out that more investors, including asset management firms, are seeking sustainability or the ability to integrate non-financial information with financial information obtained from public-listed companies.

“For the first time, we actually have transparency and understand the supply chain. With the AI platforms, that has become one of the disruptors in the financial market,” Omar says.

Another disruptor in the fund management industry is machine learning.

“Ultimately, investing is nothing else but data processing. You come up with some financial formulas, then you rank it and, [with your] portfolio, you do some risk management and you invest. The data and AI obviously have a symbiotic relationship, and you need good data to train the AI.”

Yet another disruption is emotion or lifestyle feeling, says Omar, who observes that “when it comes to finance, we don’t have a real connection with our money”.

Elaborating on his AI ambition, he says: “My idea was always that the finance industry was not very open to technologies or to change. People from my generation grew up using financial information to make financial decisions, but those from the next generation will learn to integrate non-financial information into financial decisions.”

Omar has 20 years’ experience in international banking, having worked at UBS, Morgan Stanley, Credit Suisse and Barclays. In 2012, he initiated a value-based asset management project at Barclays, originating the concept and developing it into Arabesque, which was founded a year later, following a management buyout from Barclays.

Incubated by Arabesque in 2018, ESG Book combines cutting-edge technology and proprietary research, and its wide range of cloud-based sustainability products and solutions are used by many of the world’s leading financial organisations that collectively boast more than US$120 trillion (RM570 trillion) under management.

In 2019, Arabesque AI was established as an investment advisory and technology company, emulating human decisions in finance and portfolio management through its proprietary AI engine.

Arabesque AI claims that it has been fully autonomously managing more than US$550 million worth of assets in the last three years. Its AI engine has a predictive capability that covers about 25,000 stocks globally.

The AI engine is used to evaluate and forecast investment opportunities in the financial markets, and is built architected as a massively parallel and distributed system spread across thousands of machines in multiple data centres.

Subscription-based services are made available to fund managers.

Notably, the AI signal exhibits a relatively consistent investment style, with preference for low residual volatility, strong balance sheets and fundamentals as well as a moderate track record.

Arabesque AI is majority-owned by the Arabesque Group, with DWS Group being a minority investor. It first entered the Malaysian market in 2016 through a collaboration with Bank Islam, helping the latter develop capabilities in asset management. Last November, Maybank Asset Management Sdn Bhd introduced its shariah-compliant and hyper-customised discretionary portfolio mandate in partnership with Arabesque AI.

Despite having AI in the fund management industry, Omar believes AI is unlikely to replace the role of fund managers — at least for now.

“Basically, it compensates for your mistakes and makes you better. The technology itself is not meant to replace portfolio managers. When you need human intuition, humans are still perfect,” he declares.

But, statistically, the AI feature could help improve investment returns.

“The better the data quality, the better the performance. At this stage, we are in a symbiotic relationship, AI helps you make better decisions,” he explains, noting that based on a study done by S&P Global, half of the global funds are actively managed, of which 80% have underperformed against their benchmark.

Moreover, data shows that 70% of private investments are losing money, he adds.

Citing PwC’s Global Asset and Wealth Management Survey, he says fund managers nowadays are seeking to integrate many parameters such as water, energy and health into their investment portfolios.

“To them, it is a burden. They’re worried about that. More than 90% of respondents say it is a big challenge with the integration of new regulations. Also, they have to analyse how reliable the data from the companies is. So, basically, you have to integrate technology.”

The survey also found that nearly 90% of institutional investors believe that the use of disruptive technological tools (including big data, AI and blockchain) will lead to better outcomes and returns from their portfolio. More than 90% of asset managers are already using these new technologies to enhance investment performance. Nevertheless, this is the area of investor expectation that they continue to find most challenging.

With the AI engine, investors can adjust the risk level while incorporating various sustainability metrics.

“Our objective is to bring the best data stability and technology to help portfolio managers of Malaysia do better. The machine can create a specific portfolio within an hour based on customer requirements,” Omar notes.

Asked about market competition, he touts Arabesque’s AI platforms as having certain advantages, given that current AI offerings do not have the capability to predict future movements.

“[Compared to our AI platforms], they can only look back [past performance] at a certain time period and collect all the data.”

Omar says Arabesque’s customers are from Southeast Asia, Hong Kong, Europe and the UK.

“Many of our clients in Malaysia are starting to use it; they use it for a smaller number of portfolios.”

Arabesque has offices in London, Frankfurt and Singapore, and is considering setting one up in Malaysia.

“We operate in a way that we look to build a very large client base; we want to be the No 1 AI technology company for the finance industry for portfolio management,” he says.

On whether Arabesque services need to obtain regulatory approval, he says this depends on different jurisdictions. In Malaysia, its platform is lightly regulated, with certain standards that apply, as it is a business-to-business service and does not deal with individual customers. 

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