US financial giant Vanguard Group has suspended plans to start a mutual fund business in China.
The firm Malvern, PA, has told staff members over the past few days that it is interrupting months of preparations to sell its funds to Chinese consumers. The firm intended to seek Beijing’s approval for the venture.
The $ 7.2 billion asset manager has been aiming to bring low-cost index funds to China for years, a radical idea in a country where investors price funds that choose investments and choose to defeat markets. But people familiar with the matter have now decided to take a meaningful presence in China’s fund industry longer than they expected.
The move will result in the elimination of a small number of posts.
Vanguard’s decision contrasts with other Wall Street ventures, which continue to gain Beijing’s approval to sell their own funds to Chinese consumers. Vanguard bets that it can reach Chinese individuals in a different way.
Last April, Vanguard’s joint venture with Ant launched an advisory service that builds portfolios according to individuals’ needs.
Photo:
Qilai Shen / Bloomberg News
The company focuses on its China strategy on a business with the antit Groupfirma Ant Group Co. which builds investment portfolios for consumers. The business fits in with Vanguard’s broader ambitions to grow by providing financial advice at a fraction of competitors’ costs. Vanguard believes the business can offer investors more value by providing financial advice through the business rather than competing in a tight fund market.
Vanguard is taking itself out of the fight for a license for Chinese mutual funds as trade tensions between America and China increase. The suspension of the firm’s plans makes it clear that the world’s second – largest asset manager will not jump at all costs for all the lures in China’s mother and pop market.
Vanguard will have to deal with a possible complication because he doubles his business with Ant. The Chinese firm is under regulatory pressure and is improving 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 will maintain 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,” he said. Buckley said, “and is confident in its ability to continue using its proven investment philosophy and approach to fundamental change, in order to better invest in how individuals invest in China.”
Since China began allowing foreign companies to apply for mutual fund licenses last year, large companies have been trying to show Beijing that they are all here. BlackRock Inc.
has received preliminary approval to start a mutual fund business. Companies including Neuberger Berman and Fidelity International have pending applications.
U.S. businesses are facing significant obstacles in a market in Beijing’s grip. No foreign companies started selling their own mutual funds to Chinese individuals. If another obstacle is added, Chinese banks and technology-giant distribution channels control.
Vanguard executives have fewer runways than competitors to pursue overseas adventures without a chance of payout. Vanguard is owned by investors in its US funds, and must continue to reinvest for those clients and reduce investment costs for its shareholders.
Vanguard told major Chinese investors last year that he would return their money and leave the Chinese institutional venture. The firm has decided to close its Hong Kong office, which mainly serves large clients, and to list listed funds in Hong Kong.
Over the years, executives have debated how much they should commit to China’s expansion.
Vanguard gained political goodwill there as an early proponent of the idea that investors looking for broad exposure to emerging markets should be in stocks on the continent. In 2015, ahead of other executives, Vanguard announced it would add China A shares to its emerging market index fund.
Bill McNabb, CEO of Vanguard, said in about the decade ending 2017 that the firm should allocate resources in China. According to people familiar with the conversations on Vanguard, Mr. Buckley, another top manager, is more cautious and stresses the need for data to justify the cost first.
Mr. Buckley will become CEO in 2018 as political relations between the US and China deteriorate. Vanguard has taken a narrower path in China and refocused the company to provide advice. Last April, the company’s joint venture with Ant launched an advisory service that builds portfolios according to individuals’ needs. More than 500,000 users signed up within the first year.
The firm has also made other decisions that are contrary to the wishes of China.
After Bloomberg MP increased Chinese exposure to a major bond index in April 2019, Vanguard did not reflect the full change in funds linked to the benchmark. Vanguard accepted Bloomberg’s option for a more limited exposure to China for these funds.
According to a firm spokesman, Vanguard made the decision due to restrictions in the region around currency hedging and other transactions that could cause costs and tracking errors for investors.
Write to Dawn Lim by [email protected]
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