Vanguard hits a hiatus in fund ambitions in China

American financial giant Vanguard Group has suspended plans to launch a mutual fund business in China.

The Malvern, Pa., Firm told its employees in recent days that it was pausing months of preparations to sell its funds to Chinese consumers. The firm had planned to seek Beijing’s approval for the business.

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

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

Vanguard’s decision stands in contrast to other Wall Street firms, which continue to push for Beijing’s approval to sell their own funds to Chinese consumers. Vanguard is betting it can reach the Chinese in another way.

Last April, Vanguard’s joint venture with Ant launched an automated advisory service that creates portfolios based on people’s needs.


Qilai Shen / Bloomberg News

The firm is centering its China strategy around a venture with fintech firm Ant Group Co. that builds investment portfolios for consumers. The company fits Vanguard’s broader ambitions to grow by providing financial advice at a fraction of the costs of rivals. Vanguard said it believes the firm 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 China mutual fund license as trade tensions between the United States and China mount. The company’s suspension of its plans makes it clear that despite the attractiveness of China’s home market, the world’s second-largest asset manager will not intervene at any cost.

Vanguard will have to deal with a potential complication as it will redouble its business with Ant: The Chinese firm is under regulatory pressure and is revamping its entire business.

“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 Vanguard CEO Tim Buckley.

The firm said it would maintain a team in Shanghai to support the company, monitor the market and develop its business.

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

Since China began allowing foreign firms to apply for their own mutual fund licenses last year, major firms have tried to show Beijing that they are all in. Inc.

You have received preliminary approval to start a mutual fund business. Companies like Neuberger Berman and Fidelity International have pending applications.

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

Vanguard executives have less of a clue than their rivals to pursue overseas adventures without any chance of making a profit. Investor-owned in its US funds, Vanguard must continue to reinvest for those clients and reduce the cost of investment for its shareholders.

Vanguard told major Chinese state investors last year that it was paying their money back and exiting the Chinese institutional business. The firm decided to close its Hong Kong office that served mainly large clients and liquidate the exchange-traded funds listed in Hong Kong.

Over the years, executives debated how much to commit to expanding in China.

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

Vanguard chief executive officer for roughly the decade ending in 2017, Bill McNabb, said the company needed to direct resources to China. Buckley, another senior executive, was more cautious and would emphasize the need for data first to justify costs, according to people familiar with the conversations at Vanguard.

Buckley became CEO in 2018 as political relations between the United States and China deteriorated. Vanguard took a narrower path in China and refocused the business around advising. Last April, the company’s joint venture with Ant launched an automated advisory service that creates portfolios based on people’s needs. More than 500,000 users signed up during the first year.

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

After Bloomberg LP increased the Chinese exposure of a major bond index beginning in April 2019, Vanguard did not reflect the full change in benchmark-linked funds. Vanguard took Bloomberg’s option for more limited exposure to China for those funds.

A spokeswoman for the firm said Vanguard made the decision due to limitations 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]

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