Vanguard successes pause over fund ambitions in China

The $ 7.2 trillion asset manager has for years been aiming to bring low-cost index 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 they expected, people familiar with the matter said.

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

Vanguard’s decision contrasts with other Wall Street companies, which continue to press for Beijing’s approval to sell its own funds to Chinese consumers. Vanguard is betting that it could reach the Chinese in another way.

The company is focusing its strategy in China on a venture with financial technology company Ant Group Co., which creates investment portfolios for consumers. The venture fits into Vanguard’s broader ambitions to grow, providing financial advice for a fraction of rivals’ costs. Vanguard said it believes the company can offer investors more value by providing financial advice through the venture, rather than competing in a crowded fund market.

Vanguard is emerging from the dispute over a Chinese mutual fund license as trade tensions between the U.S. and China increase. The company’s suspension of its plans makes it clear that, despite all the fascination of the Chinese family market, the world’s second-largest asset manager will not take action at any cost.

Vanguard will have to deal with a potential complication, as it has doubled its risk 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 venture, monitor the market and develop its business.

“Vanguard maintains its long-term commitment to the China market,” said Mr. Buckley, “and is confident in its ability to continue to leverage its proven investment philosophy and approach to fundamentally change for the better the way individuals in China they invest ”.

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

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

American companies face significant obstacles in a market in the hands of Beijing. No foreign company has started selling its own mutual funds to Chinese individuals. Adding another obstacle, Chinese banks and tech giants control distribution channels.

Vanguard executives have less space than rivals to pursue adventures abroad with no chance of reward. Owned by investors in its American funds, Vanguard needs to continue reinvesting for these customers and reducing the investment cost for its shareholders.

Vanguard told major Chinese state-owned investors last year that it was returning its money and leaving the Chinese institutional business. The company decided to close its Hong Kong office, which mainly served large clients, and to close funds traded on a Hong Kong exchange.

Over the years, executives have debated how much they should commit to expansion in China.

Vanguard obtained political goodwill as one of the first defenders of the idea that investors seeking broad exposure in emerging markets should be in stocks on the continent. In 2015, ahead of other managers, Vanguard announced that it would add China’s A shares to its famous emerging markets index fund.

Vanguard’s chief executive in approximately the decade ending in 2017, Bill McNabb, said the company needed to commit resources in China. Buckley, another high-ranking executive, was more cautious and emphasized the need for data first to justify costs, according to people familiar with the conversations at Vanguard.

Mr. Buckley became CEO in 2018, when political relations between the U.S. and China deteriorated. Vanguard followed a narrower path in China and redirected the business around counseling. Last April, the company’s joint venture with Ant launched a robotic consulting service that creates portfolios according to the needs of individuals. More than 500,000 users signed up in the first year.

The company also made other decisions that went against China’s will.

After Bloomberg LP increased Chinese exposure to a major bond index as of April 2019, Vanguard did not reflect the total variation in funds linked to the benchmark. Vanguard opted for Bloomberg for more limited Chinese exposure to these funds.

A company spokeswoman said Vanguard made the decision because of restrictions in the region surrounding currency hedging and other transactions that could add costs and tracking errors for investors.

Write to Dawn Lim at [email protected]