Vanguard pauses on fund ambitions in China

The $ 7.2 trillion asset manager has aimed for years to bring low-cost index funds to China, a radical idea in a country where investors reward funds that pick and choose investments to beat the markets. But Vanguard executives have now decided that building a meaningful presence in China’s fund industry will take longer than expected, people familiar with the matter said.

This change will result in the elimination of a small number of jobs.

Vanguard’s move contrasts with other Wall Street companies, which continue to seek approval from Beijing to sell their own funds to Chinese consumers. Vanguard is betting he can reach the Chinese in another way.

The company focuses its strategy in China around a business with financial technology firm Ant Group Co., which creates investment portfolios for consumers. The company is part of Vanguard’s larger ambitions to grow by providing financial advice at a fraction of the costs of its competitors. Vanguard said she believes the company can offer investors more value by providing financial advice through the company rather than competing in a crowded fund market.

Vanguard is pulling out of the race for a Chinese mutual fund license as trade tensions between the United States and China escalate. The company’s suspension of its plans makes it clear that despite the lure of the Chinese mother and child market, the world’s second largest asset manager will step in at no cost.

Vanguard will face a potential complication, as it doubles its business with Ant: the Chinese company is under regulatory pressure and is reorganizing all of its activities.

“We believe there is a clear opportunity to meet the growing demand for professional advisory services in China by focusing on our joint venture with Ant at this time,” said Tim Buckley, CEO of Vanguard.

The company said it will maintain a team in Shanghai to support the business, monitor the market and expand its business.

“Vanguard maintains its long-term commitment to the Chinese market,” Mr. Buckley said, “and is confident in its ability to continue to leverage its time-tested investment philosophy and approach to fundamentally change the market. how people in China invest. ”

Since China started letting foreign companies apply for their own mutual fund licenses last year, big companies have tried to show Beijing that they are all involved. BlackRock Inc.

received preliminary approval to start a mutual fund business. Companies such as Neuberger Berman and Fidelity International have pending claims.

US companies face significant hurdles in a Beijing-ruled market. No foreign company has started selling its own mutual funds to Chinese individuals. Adding another hurdle, Chinese banks and tech giants control distribution channels.

The leaders of Vanguard have fewer avenues than their rivals to pursue adventures abroad with no chance of winning. Owned by investors in its US funds, Vanguard must continue to reinvest for these clients and reduce the cost of investment for its shareholders.

Vanguard told major investors in the Chinese state last year that it was returning their money and quitting Chinese institutional operations. The company decided to close its Hong Kong office which mainly served large clients and liquidate the exchange traded funds listed in Hong Kong.

Over the years, leaders have questioned how much to commit to developing in China.

Vanguard showed political goodwill there as an early proponent of the idea that investors seeking broad exposure to emerging markets should be in equities from the continent. In 2015, ahead of other managers, Vanguard announced it would add Chinese A-shares to its benchmark emerging markets index fund.

Vanguard chief executive in roughly the decade ending 2017, Bill McNabb, said the company needed to commit resources to China. Mr Buckley, another senior executive, was more cautious and would insist on having data first to justify the costs, according to people familiar with the conversations at Vanguard.

Mr Buckley became CEO in 2018 as political relations between the United States and China deteriorated. Vanguard has taken a narrower path in China and refocused its business on providing advice. Last April, the company’s joint venture with Ant launched a robotic consulting service that builds portfolios around the needs of individuals. Over 500,000 users signed up in the first year.

The firm also made other decisions that went against China’s wishes.

After Bloomberg LP stepped up Chinese exposure to a major bond index from April 2019, Vanguard did not reflect the full variation in funds linked to the benchmark. Vanguard chose Bloomberg’s option for more limited exposure to China for these funds.

A spokesperson for the firm said Vanguard made the decision due to constraints in the region around currency hedging and other transactions that could add costs and tracking errors for investors.

Write to Dawn Lim at [email protected]