How AI is making its way into fund management in Asia

The launch of two funds claiming to be among the first to utilize AI and machine learning in fund management shows the early stages of this recent innovation in Asia

WITH the boom of artificial intelligence (AI) in Asia, fund managers are starting to look into launching funds which are managed using AI and machine learning. The recent launch of two such funds, the SCB Machine Learning Thai Equity Fund (SCBMLT) and BlackRock’s China A-Share Opportunities Fund, show the early stages of this recent innovation in Asia.

Asian enterprises, especially those in China and India, are rapidly investing in and adopting AI. Chinese companies like Alibaba, Baidu and Tencent are threatening US tech giants such as Google in the AI field. Moreover, Japan, Singapore and South Korea are also expanding their existing strengths in robotics and electronics to compete against companies like Intel and NVIDIA.

In this context, SCB Asset Management (SCBAM), a large Thailand-based fund manager with over 1.375 trillion Thai baht (US$42.01 billion) of assets under management, recently launched an equity investment fund in December 2017 employing AI to conduct analysis and select stocks.

SCBAM invested 10 million baht in dedicated infrastructure for advanced data analytics to launch the SCBMLT Fund, which may be the first AI-managed fund launched by a local fund manager based in Asia.

With a registered investment of about three billion baht, the fund is managed by AI and machine learning techniques. The fund is forecast to generate an annual return on investment of about 5%, according to SCBAM president Smith Banomyong.

“The AI tool will select stocks in Thailand’s SET100 Index that meet selected investment criteria such as growth momentum, quality, sentiment, valuation and risk,” Banomyong says, noting that AI outperforms humans in assessing information because humans take longer and are more error-prone.

However, full control is not yet in the hands of AI. In the SCBMLT Fund, fund managers will still have the ultimate authority on stock selection and can decide when to buy or sell certain stocks in the fund's portfolio. SCBAM says this can prevent irregularities in trade orders from the AI only recommending overweight stocks or stocks clustered in a specific sector. Three months after inception, the fund had generated an alpha of 2.19%, according to SCBAM.

According to one senior executive at a Chinese asset management company speaking to The Asset, China is particularly ideal for AI-managed funds, given the dynamics of the Chinese market.

“The China market is relatively inefficient and retail dominated. If you only apply three factors, say, for example, value, momentum and volatility into the market for five years, it does not work that way, because this market is so dynamic. It is changing every year according to retail behaviours, policies and market factors,” says the senior executive.

“Only if you rotate these factors in accordance with the different market cycles or conditions, will you be able to optimize the investment returns. That is where the AI technology is needed,” adds the executive.

Last year, Blackrock announced they would roll out an AI-driven China fund, the China A-Share Opportunities Fund, which uses machine learning, big data and AI to invest in equities through the Stock Connect. The fund was then launched in October 2017 and as of March 2018 had US$228.77 million of assets under management.

The fund has been designed for investors seeking growth, alpha and diversification in the Chinese market, according to Blackrock. The fund is a long-only, systematic active equity Ucits strategy, which combines traditional quantitative signals, big data and machine learning to identify about 300 companies selected from 1,300 Chinese companies.

For a period of five years, the strategy was only offered to institutional investors before being opened up to retail investors, according to Jeff Shen, managing director, head of BlackRock's emerging markets and co-head of investments for BlackRock's scientific active equity.

“We find these insights (big data, machine learning and AI) have extraordinary relevance in a market like China where data is quite often available and the market is large and complex,” says Shen.