Vanguard hits a break for fund ambitions in China

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

The change will eliminate a small number of jobs.

Vanguard’s decision is in contrast to other Wall Street firms that continue to strive for Beijing’s approval to sell its own funds to Chinese consumers. Vanguard bets it can reach Chinese people in another way.

The company focuses its strategy for China around an enterprise with the financial-technology group company Ant Group Co., which builds investment portfolios for consumers. The project fits Vanguard’s broader ambitions to grow by providing financial advice at a fraction of rival costs. Vanguard said it believes the firm can provide more value to investors by providing financial advice through the project, rather than through competition in a crowded fund market.

Vanguard is out of competition for a Chinese mutual fund license as US-China trade tensions escalate. The company’s suspension of its plans makes it clear that for all the appeal of China’s parent and pop market, the world’s second-largest asset manager will not come at any cost.

Vanguard will have to deal with a possible complication, as it doubles its activity with Ant: The Chinese company is under regulatory pressure and is renewing its entire business.

“We believe there is a clear opportunity to meet the growing demand for professional consulting services in China, focusing on our joint venture with Ant right now,” said Vanguard CEO Tim Buckley.

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

“Vanguard maintains its long-term commitment to the Chinese market,” said Mr. Buckley, “and is confident in its ability to continue to take advantage of the time-tested investment philosophy and approach to fundamental change to improve the way we invest.” the people of China ”.

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. BlackRock Inc.

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

US firms face significant obstacles in a market under Beijing’s control. No foreign company has started selling its own mutual funds to Chinese people. Adding another hurdle, Chinese banks and technology giants control distribution channels.

Avant-garde executives have less track than rivals to continue adventures abroad without any chance of reward. Owned by investors in its US funds, Vanguard must continue to invest for those customers and reduce the cost of investment for its shareholders.

Vanguard told major Chinese state investors last year that it was returning their money and giving up the Chinese institutional business. The company decided to close the Hong Kong office that served mainly large customers and liquidate the exchange-traded funds listed in Hong Kong.

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

Vanguard gained political goodwill there as an early supporter of the idea that investors seeking wide exposure in emerging markets should be in continental action. In 2015, ahead of other managers, Vanguard announced that it would add A shares in China to its emerging market index fund.

Vanguard’s chief executive in the decade leading up to 2017, Bill McNabb, said the company must allocate resources to China. Mr Buckley, another top executive, was more cautious and would stress the need for data to justify costs first, according to people familiar with the Vanguard talks.

Mr Buckley became CEO in 2018 as US-China political relations deteriorated. Vanguard has taken a narrower path in China and reoriented the business in providing advice. In April last year, the company’s joint venture with Ant launched a robotic consulting service that builds portfolios based on the needs of individuals. More than 500,000 users signed up in the first year.

The company also made other decisions that were contrary to China’s wishes.

After Bloomberg LP increased China’s exposure to a major bond index since April 2019, Vanguard did not reflect the complete change in funds related to the reference value. Vanguard has taken the Bloomberg option for a more limited exposure of China to these funds.

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

Write to Dawn Lim la [email protected]