Vanguard Hits Pause on Fund Ambitions in China

This article was originally published on this site

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

The Malvern, Pa., firm told staffers in recent days that it was pausing months of preparations to sell its funds to Chinese consumers. The firm had been planning 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 prize funds that pick and choose investments to beat markets. But Vanguard executives have now decided that building a meaningful presence in China’s fund industry would take longer than they expected, people familiar with the matter said.

The shift will result in a small number of jobs being eliminated.

Vanguard’s decision stands in contrast to other Wall Street firms, which are continuing a push to get Beijing’s approval to sell their own funds to Chinese consumers. Vanguard is betting that it can reach Chinese individuals another way.

Last April, Vanguard’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs.

Photo: Qilai Shen/Bloomberg News

The firm is focusing its China strategy around a venture with financial-technology firm Ant Group Co. that builds investment portfolios for consumers. The venture fits with Vanguard’s broader ambitions to grow by providing financial advice at a fraction of rivals’ costs. Vanguard said it believes the firm can offer investors more value by delivering financial advice through the venture rather than competing in a crowded fund market.

Vanguard is taking itself out of the running for a Chinese mutual-fund license as U.S.-China trade tensions rise. The firm’s suspension of its plans makes clear that for all the allure of China’s mom-and-pop market, the world’s second largest asset manager won’t jump in at any cost.

Vanguard will have to deal with a potential complication, as it doubles down on its venture with Ant: The Chinese firm is under regulatory pressure and 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 Chief Executive Officer Tim Buckley.

The firm said it would 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,” Mr. Buckley said, “and is confident in its ability to continue leveraging its time-tested investment philosophy and approach to fundamentally change for the better how individuals in China invest.”

Since China began letting foreign firms apply for mutual-fund licenses of their own last year, major firms have tried to show Beijing they are all in. BlackRock Inc. has received preliminary approval to start a mutual-fund business. Firms including Neuberger Berman and Fidelity International have pending applications.

U.S. firms face significant obstacles in a market in Beijing’s grip. No foreign firms have started selling their own mutual funds to Chinese individuals. Adding another hurdle, Chinese banks and tech giants control distribution channels.

Vanguard executives have less runway than rivals to pursue overseas adventures with no chance of payoff. Owned by investors in its U.S. funds, Vanguard has to keep reinvesting for those clients and lowering the cost of investing for its shareholders.

Vanguard told major Chinese state investors last year it was returning their money and exiting the Chinese institutional business. The firm decided to shut down its Hong Kong office that mainly serviced big clients and wind down Hong Kong-listed exchange-traded funds.

With tensions running high, Washington and Beijing have pushed to decouple technology and trade. But American financial firms including JPMorgan and Goldman Sachs are doubling down on investing in China and expanding headcount. Photo Composite: Crystal Tai (Video from 10/7/20)

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

Vanguard scored political goodwill there as an early supporter of the idea that investors seeking broad emerging-markets exposure should be in mainland stocks. In 2015, before other managers, Vanguard announced it would add China A-shares to its marquee emerging-market index fund.

Vanguard’s chief executive in roughly the decade ending 2017, Bill McNabb, said the firm needed to commit resources into China. Mr. Buckley, another top executive, was more cautious and would stress the need for 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 U.S. and China deteriorated. Vanguard took a narrower path in China and refocused the business around providing advice. Last April, the firm’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs. More than 500,000 users signed up within the first year.

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

After Bloomberg LP ramped up Chinese exposure of a major bond index starting in April 2019, Vanguard didn’t mirror the full change in funds tied to the benchmark. Vanguard took Bloomberg’s option for more limited China exposure for those funds.

A firm spokeswoman said Vanguard made the decision because of constraints in the region around currency hedging and other transactions that could add costs and tracking error for investors.

Write to Dawn Lim at dawn.lim@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8