Vanguard Hits Pause on Fund Ambitions in China

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

A small number of jobs will be lost due to the shift.

Vanguard’s decision contrasts with other Wall Street companies, who continue to press for Beijing’s approval to sell their own money to Chinese consumers. Vanguard is betting that it can reach Chinese individuals in a different way.

The company centers its Chinese strategy around a venture with the financial technology company Ant Group Co. that builds investment portfolios for consumers. The company is part of Vanguard’s broader ambitions to grow by providing financial advice at a fraction of the cost of the competition. Vanguard said it believes the company can provide more value to investors by providing financial advice through the firm rather than competing in a crowded fund market.

Vanguard is pushing itself out for a Chinese mutual fund license as trade tensions between the US and China intensify. The company’s suspension of plans makes it clear that, despite all the allure of China’s mother-and-pop market, the world’s second-largest asset manager will not intervene at all costs.

Vanguard will face a potential complication as it doubles its venture with Ant: the Chinese company is under regulatory pressure and is overhauling 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 Tim Buckley, Vanguard’s Chief Executive Officer.

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

“Vanguard maintains its long-term commitment to the Chinese market,” said Mr. Buckley, “and is confident that it can continue to use its proven investment philosophy and approach to fundamentally change the better way individuals invest in China. “

Since China allowed foreign firms to apply for their own mutual fund license last year, large firms have been trying to show Beijing that they’re all there. BlackRock Inc.

has received preliminary approval to start a mutual fund. Companies such as Neuberger Berman and Fidelity International are pending applications.

US companies face significant obstacles in a Beijing-owned market. No foreign firm has started selling their own mutual funds to Chinese individuals. Adding one more hurdle, Chinese banks and tech giants are controlling distribution channels.

Vanguard managers have less runway than rivals to pursue adventures overseas with no chance of payout. Owned by investors in its US funds, Vanguard must continue to reinvest for those clients and reduce investment costs for its shareholders.

Vanguard told major Chinese state investors last year that it was returning their money and halting Chinese institutional affairs. The company decided to close its Hong Kong office, which mainly served large clients, and to phase out Hong Kong-listed exchange-traded funds.

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

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

Vanguard’s CEO in roughly the decade ending in 2017, Bill McNabb, said the company needed to deploy resources in China. According to people familiar with the talks at Vanguard, Mr. Buckley, another top executive, was more cautious and first stressed the need for data to justify the costs.

Mr. Buckley became CEO in 2018 as political relations between the US and China deteriorated. Vanguard narrowed down in China and refocused the company on providing advice. Last April, the company’s joint venture with Ant launched a roboadvisory service that builds portfolios around the needs of individuals. Within the first year, more than 500,000 users signed up.

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

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

A regular spokeswoman said Vanguard made the decision due to region restrictions on currency hedging and other transactions that could increase costs and tracking error for investors.

Write to Dawn Lim at [email protected]